The rupee appreciated 19 paise to close at 82.51 against the US dollar on Wednesday after the Reserve Bank of India (RBI) hiked the repo rate by 25 basis points.
The rupee was also bolstered by a rise in domestic equity markets and a drop in the value of the dollar relative to major foreign currencies, according to currency traders.
However, they continued, rising petroleum prices on the global market and ongoing outflows of foreign funds limited the local unit's tendency to appreciate.
The local currency at the interbank foreign exchange market started off strongly at 82.67 versus the dollar and achieved an intraday high of 82.47 and a low of 82.72.
It finally settled at 82.51, up 19 paise over its previous close of 82.70.
Reserve Bank's monetary policy
When the Reserve Bank of India boosted borrowing costs by the anticipated 25 basis points on Wednesday, it slowed the rate of hikes for the second time in a row, but it also signalled that there would be more to come as core inflation remained high.
According to the central bank's forecast, India's economy will grow by 6.4% between 2023 and 2024, which is roughly in line with the Economic Survey's prediction that was presented to Parliament last week.
It also estimated retail inflation to ease to 5.3 per cent in the next fiscal from 6.5 per cent this year on assumptions of lower imported inflation, even though core inflation remains sticky.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, slipped 0.38 per cent to 103.03.
Benchmark Brent crude futures increased 1.31% to USD 84.79 per barrel of oil.
The 30-share BSE Sensex increased by 377.75 points or 0.63 percent to close at 60,663.79 on the domestic equities market, while the larger NSE Nifty increased by 150.20 points or 0.85 percent to close at 17,871.70.
According to exchange data, Foreign Institutional Investors (FIIs) sold shares worth Rs 2,559.96 crore on Tuesday, making them net sellers in the capital markets.
With inputs from Agencies.
