Rising for the third straight session, the rupee climbed 24 paise to close at 75.29 against the US dollar on Tuesday amid persistent foreign fund inflows and weakening of the American currency overseas.
However, elevated crude oil prices and lingering geopolitical concerns capped the gains, forex traders said.
At the interbank forex market, the domestic unit opened at 75.54 against the US dollar and touched an intra-day high of 75.27.
It finally closed at 75.29, registering a rise of 24 paise over its previous close of 75.53.
The dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.09 per cent down at 98.90.
"Persistent risk-on sentiments, weak dollar index and stronger regional (Asian) currencies have been supporting the local unit in northbound movement," said Dilip Parmar, Research Analyst, HDFC Securities.
"On the global front, investors are assessing measures taken against Russia and the outlook for China's economic growth as Shanghai remained in lockdown. Near-term focus will remain RBI monetary policy decision and stance," Parmar added.
On the domestic equity market front, the 30-share BSE Sensex ended 435.24 points or 0.72 per cent lower at 60,176.50, and the broader NSE Nifty tumbled 96.00 points or 0.53 per cent to 17,957.40.
Brent crude futures, the global oil benchmark, rose 1.04 per cent to USD 108.65 per barrel.
Foreign institutional investors remained net buyers in the capital market on Tuesday as they purchased shares worth ₹374.89 crore, according to stock exchange data.
According to Sugandha Sachdeva, Vice President - Commodity and Currency Research, Religare Broking Ltd, the rupee has perked up by around 0.90 per cent this week.
"However, going forward, the rupee is unlikely to hold on to the recent gains as the concerns about new sanctions against Russia by the western nations have led to a strong retreat in crude oil prices, accentuating the tight global supply scenario," Sachdeva said.
The geopolitical crisis continues to dominate the sentiments and is likely to weigh on the domestic currency. The expectations of rapid-fire rate hikes by the US Fed to rein in decades-high inflation are also keeping the dollar index buoyant, a key headwind for the Indian rupee, Sachdeva noted.
Markets are now focused on the minutes of the last US Fed meeting and the RBI MPC outcome, both scheduled this week, for further cues about the monetary policy stance of the respective central banks.
"We believe that the rupee is likely to witness renewed selling pressure in the coming days, wherein the 75.20 mark will act as a stiff hurdle for the rupee-dollar exchange rate," Sachdeva added.
Sriram Iyer, Senior Research Analyst at Reliance Securities, said the rupee appreciated against the US dollar on Tuesday, supported by offshore funds returning to domestic equities.
Asian and emerging market peers were broadly stronger and lent support while the markets also shrugged off strong crude oil prices.
"Exporter selling and lumpy corporates were major drivers of Rupee appreciation. With oil prices stable, Rupee is seeing some FPI inflows as well," said Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities Ltd.
Banerjee further noted that "we could see volatility increasing during the second half of this week. We expect a range of 75.00 and 75.80 on spot, over the near-term."