The rupee appreciated by 8 paise to close at 81.22 (provisional) against the US dollar on Thursday on broad dollar weakness after Federal Reserve Chairman Jerome Powell said the pace of interest rate hikes may slow.
Forex traders said foreign fund inflows and a rally in domestic equities boosted investor sentiments.
At the interbank foreign exchange market, the local unit opened at 81.08 and touched an intra-day high of 80.98 and a low of 81.32 against the greenback.
The local unit finally settled at 81.22, registering a rise of 8 paise over its previous close.
On Wednesday, the rupee closed at 81.30 against the US dollar, on month-end exporter dollar selling and MSCI rebalancing related inflows.
"The Indian rupee started the new month on a front foot following stronger Asian currencies and risk-on sentiments.
"It has gained in three out of the last four days as the dollar index slipped to a three-month low after Fed Chair Jerome Powell confirmed the pace of interest rates set to slow along with China easing the COVID restrictions," said Dilip Parmar, Research Analyst, HDFC Securities.
Parmar further noted that in the near-term, spot USDINR has support at 80.72, the 100 days simple moving average and resistance at 81.91, the recent swing high formed on November 21. The bias remains bearish for the pair as long as it trades below 82.10.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, slipped 0.41 per cent to 105.51.
Global oil benchmark Brent crude futures declined 0.10 per cent to USD 86.88 per barrel.
On the domestic equity market front, the 30-share BSE Sensex advanced 184.54 points or 0.29 percent to end at 63,284.19, while the broader NSE Nifty gained 54.15 points or 0.29 percent to 18,812.50.
Foreign Institutional Investors (FIIs) were net buyers in the capital markets on Wednesday as they purchased shares worth Rs 9,010.41 crore, according to exchange data.
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