Snapping a four-session downturn, the rupee appreciated by 23 paise to end 71.11 against the US dollar on Wednesday amid easing oil prices and a firm greenback.
A positive trend in the global equity markets, which rose on optimism surrounding the ongoing US-China trade talks, also supported the rupee, analysts said.
At the Interbank Foreign Exchange (forex) market, the domestic unit opened strong at 71.29 but surrendered the gains to slip to a low of 71.34
However, it clawed back lost ground and finally ended at 71.11, up 23 paise.
The rupee had closed at 71.34 versus the greenback Monday. Money markets were closed Tuesday on account of Chhatrapati Shivaji Jayanti.
"Rupee has broken the four days losing streak by appreciating 23 paise against the dollar. All the Asian equity markets closed on a strong wicket today, amid continued optimism that upcoming round of talks between the US and Chinese officials will take the two nations closer toward achieving a trade deal in the foreseeable future.
"The US dollar Index was capped against its peers today on falling US yields and before the Federal Reserve's policy meeting minutes, scheduled today. The benchmark 10-year US Treasury yield fell sharply to 2.628, the lowest level since 3rd Jan 2019.
"The Reserve Bank of India (RBI) in its board meeting decided to transfer Rs 28,000 crore as interim dividend to the government for the period of July to December 2018. The dividend transfer will help the Centre meet its revised fiscal deficit target of 3.4 per cent of gross domestic product for FY19. With this surplus transfer, the total dividend payout by the RBI to the government in FY19 stands at Rs 68,000 crore. Lower fiscal deficit would provide floor to the indian currency," said V K Sharma, Head PCG and Capital Markets Strategy, HDFC Securities.
Meanwhile, foreign institutional investors (FIIs) pumped in Rs 713.47 crore on a net basis in capital markets on Wednesday.
Brent crude futures, the global oil benchmark, was trading 0.56 per cent lower at USD 66.08 per barrel.
The dollar index, which gauges the greenback's strength against a basket of six currencies, inched up 0.04 per cent to 96.56.
Reversing a nine-session falling streak, the BSE Sensex rebounded 404 points or 1.14 per cent Wednesday as investors snapped up recently hammered stocks amid optimism in global markets over the US-China trade talks.
The broader NSE Nifty soared 131.10 points or 1.24 per cent.
US President Donald Trump on Tuesday said the negotiations were going very well, but refrained from committing any extension of the March 1 deadline to arrive at an understanding.
The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 71.1773 and for rupee/euro at 80.7075. The reference rate for rupee/British pound was fixed at 92.9272 and for rupee/100 Japanese yen at 64.21.
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