The rupee appreciated by 63 paise to close at a one-month high of 81.97 (provisional) against the US dollar on Friday, as fresh foreign fund inflows and positive domestic equities supported investor sentiments.
Forex traders said positive PMI services data also boosted investor sentiments.
At the interbank foreign exchange market, the local unit opened at 82.28 against the American currency and finally settled at 81.97 (provisional) against the greenback, registering a gain of 63 paise over its previous close of 82.60.
During the trading session, the rupee touched a high of 81.92 and a low of 82.35 against the dollar.
The Indian rupee touched a one-month high on hot services PMI data, said Anuj Choudhary - Research Analyst at Sharekhan by BNP Paribas.
The Indian services sector expanded at the strongest rate in 12 years in February supported by favourable demand conditions and new business gains, a monthly survey said on Friday. The seasonally adjusted S&P Global India Services PMI Business Activity Index rose from 57.2 in January to 59.4 in February -- its highest level in 12 years.
"We expect the rupee to trade with a slight positive bias on improved global risk sentiments and fresh FII inflows. Weak crude oil prices may also support the domestic currency," Choudhary said.
However, any pullback in the US dollar amid rising expectations of hawkish Federal Reserve and concerns over slowdown in India's GDP growth rate may cap the upside and weigh on rupee at higher levels, he added.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.19 per cent to 104.82.
Global oil benchmark Brent crude futures fell 0.55 per cent to $84.28 per barrel.
On the domestic equity market front, the 30-share BSE Sensex advanced 899.62 points or 1.53 per cent to end at 59,808.97, while the broader NSE Nifty rose 272.45 points or 1.57 per cent to 17,594.35.
Foreign Institutional Investors (FIIs) were net buyers in the capital market on Thursday as they purchased shares worth ₹12,770.81 crore, according to exchange data.