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The rupee appreciated 35 paise to 81.58 against the US dollar in early trade on Thursday as the American currency retreated from its elevated levels.
At the interbank foreign exchange, the domestic unit opened at 81.60 against the dollar, then touched 81.58, registering a gain of 35 paise over its previous close.
In initial trade, the rupee also touched 81.75 against the American currency.
On Wednesday, the rupee plunged below the 82-mark for the first time in intraday trade before settling 40 paise down at 81.93 against the dollar.
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However, concerns on fiscal loosening and monetary tightening will keep the dollar supported and cap gains for the local currency.
Most Asian and emerging market peers started weak on Thursday morning and will also cap gains in the rupee.
"Investors now await the RBI's monetary policy committee's decision on Friday, with growing expectations of a 50-basis points hike due to the pressure on the rupee from hefty interest rate hikes in the US," Iyer noted.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, rose 0.61 per cent to 113.28.
Brent crude futures, the global oil benchmark, fell 0.46 per cent to $88.91 per barrel.
In the domestic equity market, the 30-share BSE Sensex was trading 361.13 points or 0.64 per cent up at 56,959.41 and the broader NSE Nifty rose 133.75 points or 0.79 per cent to 16,992.35.
Foreign Institutional Investors (FIIs) were net sellers in the capital markets as they offloaded shares worth ₹2,772.49 crore on Wednesday, according to exchange data.
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