The rupee ended stronger at 61.80 against the dollar after the RBI governor in interview with a television channel said that the central bank will not rush to hike interest rates.
The Indian unit, which had closed at 61.97 on Monday, rose to as much as 61.79 in intraday trade.
Among other things, higher interest rates have forced companies to put-off investments for a while now. Asia's third largest economy has been plagued with a sub-five per cent growth with manufacturing production staying flat in the first six months of the fiscal.
Foreign investors have been looking at lucrative investment destinations amid global slowdown. A higher inflow of dollars in the form of foreign direct investment could have boosted the rupee.
A slow policy response and uncertainty over the next government in the Centre has kept long-term investors away from Indian shores.
The currency markets will remain closed on Wednesday for Christmas. When the markets re-open on Thursday, currency analysts expect the rupee to trade in the 61.50 to 62.50 range.
Call rates, G-Sec
The inter-bank call money rate, the rate at which banks borrow short-term funds from each other, closed slightly lower at 8.70 per cent against the previous close of 8.75 per cent.
The widely traded 8.83 per cent government security, which matures in 2023, closed lower at Rs 99.75 from the previous close of Rs 100.07.
Yields on the security hardened to 8.86 per cent from previous close of 8.81 per cent. Bond prices and yields move in the opposite direction.