The rupee darted up 14 paise to finish at 68.44 against the US dollar on Thursday after dovish comments by US Federal Reserve chair Jerome Powell boosted emerging market currencies.
However, firming oil prices capped the gains, traders said.
At the interbank foreign exchange market, the local unit opened on a firm footing at 68.31, and shuttled between a high of 68.30 and a low of 68.48 during the day. The rupee finally closed at 68.44, down 14 paise over its previous close.
The rupee had declined by 7 paise to close at 68.58 against the greenback Wednesday, pressured by persistent foreign fund outflows and firming crude oil prices.
World stocks rose and emerging market currencies appreciated after US Federal Reserve Chairman Jerome Powell told a Congressional committee that the central bank is ready to "act as appropriate" to boost growth amid multiple headwinds, bolstering hopes of a rate cut as early as this month.
"Rupee strengthened along with the emerging market peers...US rate cut probability has risen after Powell made a direct reference to the possibility of bigger than 25 bp rate cut this month in testimony.
"Rupee has resumed its uptrend after five days of consolidation. Resistance for the rupee is seen somewhere around 68 levels," said V K Sharma, Head PCG and Capital Markets Strategy, HDFC Securities.
The dollar index, which gauges the greenback's strength against a basket of six currencies, dropped 0.23 per cent to 96.87.
Brent crude futures, the global oil benchmark, spurted 0.24 per cent to USD 67.17 per barrel amid reduced US inventories and geopolitical tensions.
US oil producers have reduced output following major storms in the Gulf of Mexico, while geopolitical tensions ratcheted up after Iranian boats reportedly tried to seize a British oil tanker in the Persian Gulf.
The 10-year government bond yield was at 6.49 per cent.
Meanwhile, domestic equity benchmarks shook off their recent weakness following Fed's dovish comments.
After rising as much as 335 points during the day, the 30-share BSE Sensex settled 266.07 points or 0.69 per cent higher at 38,823.11. Similarly, the broader NSE Nifty climbed 84 points, or 0.73 per cent, to 11,582.90.
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