The rupee appreciated by 17 paise to close at 79.23 (provisional) against the US dollar on Friday after the Reserve Bank hiked interest rates by 50 basis points.
At the interbank foreign exchange market, the domestic currency opened at 79.15 per dollar and hovered in a range of 78.94 to 79.29 during the session.
The domestic unit finally settled at 79.23, up 17 paise over its previous close of 79.40.
The Reserve Bank on Friday raised the key interest rate, the third straight increase since May, in an effort to cool the stubbornly-high inflation and defend the rupee.
The repurchase rate was raised by 50 basis points to lift the interest rate to the pre-pandemic level. The 5.40 per cent repo rate was last seen in August 2019.
Meanwhile, the dollar index, which measures the greenback's strength against a basket of six currencies, was up 0.25 per cent at 105.95.
Forex traders said foreign fund inflows into capital markets and softening crude oil prices boosted the local currency.
Foreign institutional investors remained net buyers in the capital market on Thursday as they purchased shares worth ₹1,474.77 crore, as per exchange data.
Brent crude futures, the global oil benchmark, rose 0.20 per cent to $94.31 per barrel.
Reserve Bank of India (RBI) Governor Shaktikanta Das said the RBI will remain watchful and maintain the stability of the rupee.
"The depreciation of the Indian rupee is more on account of the appreciation of the US dollar rather than weakness in macroeconomic fundamentals of the Indian economy. Market interventions by the RBI have helped in containing volatility and ensuring the orderly movement of the rupee," he said.
On the domestic equity market front, the BSE Sensex ended 89.13 points or 0.15 per cent higher at 58,387.93, while the broader NSE Nifty advanced 15.50 points or 0.09 per cent to 17,397.50.