The rupee turned positive as the country's move to withdraw larger banknotes from circulation was seen as a positive for the economy, ushering transparency and leading to easing inflation.
The recovery offset an initial bout of uncertainty about the banking measures, which had been compounded as Republican candidate Donald Trump shocked investors by winning the US presidential election.
The rupee strengthened to a one-month high after earlier falls had prompted the central bank to intervene in currency markets.
The partially convertible rupee was trading at 66.44 versus its previous close of 66.6150/6250 at 4.50 pm local time after hitting 66.40, its highest since October 4.
Prime Minister Narendra Modi's unexpected announcement on Tuesday to remove from circulation 500 and 1,000 rupee notes was seen as likely to hit consumer demand in the short-term.
But any pain will turn to longer-term gains, as it will help usher in transparency, boost taxes and lower inflation, economists said.
“In the near term, adjustments might prove difficult, but beyond that it will be hugely beneficial for all of India and India's reputation globally,” said Jaspal Bindra, chairman of financial firm Centrum Group.
Bonds held on to its gains, with the benchmark 10-year bond yield down 13 basis points at 6.67 per cent. Benchmark yields touched a session low of 6.64 per cent, its lowest level since June 9, 2009.