The rupee gained 5 paise to settle at 82.55 against the US dollar on foreign fund inflows and risk-on sentiments ahead of the Reserve Bank of India's monetary policy decision on Thursday.
At the interbank foreign exchange market, the local unit opened at 82.56 against the US dollar and settled at 82.55 (provisional), up 5 paise over its previous close.
During the day, the domestic unit witnessed an intra-day high of 82.46 and a low of 82.57.
On Tuesday, the rupee closed at 82.60 against the US currency.
The dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.10 per cent to 104.02.
Global oil benchmark, Brent crude futures, advanced 0.51 per cent to $76.68 per barrel.
According to Dilip Parmar, Research Analyst, HDFC Securities, the Indian rupee strengthened for the second day in a row following dollar inflows and risk-on sentiments ahead of the RBI monetary policy decision.
RBI is scheduled to announce its bi-monthly monetary policy meeting's outcome on Thursday. RBI is largely expected to leave the repo rate unchanged at 6.5 per cent.
"The market is pricing in pause for a second straight meeting as inflation eases. All eyes will be on a policy stance, which might support growth as inflation could cool further in the months ahead on an expectation of better monsoons and lower commodity prices," Parmar said.
Parmar further added that Spot USDINR is expected to remain calm within the range of 82.20 to 82.90. "One can expect directional trends only after the Federal Reserve's policy meeting scheduled next week," he said.
On the domestic equity market front, the 30-share BSE Sensex advanced 350.08 points or 0.56 per cent to end at 63,142.96 points, and the broader NSE Nifty rose 127.40 points or 0.68 per cent to 18,726.40 points.
Foreign Institutional Investors (FIIs) were net buyers in the capital market on Tuesday as they purchased shares worth ₹385.71 crore, according to exchange data.