The rupee recovered from record low level and closed with a steep gain of 75 paise at 86.03 (provisional) against the US dollar as global crude oil prices went down following hopes of deescalation in Middle East tensions.
A weak greenback and positive sentiments in the domestic equity markets further boosted the local unit, according to forex traders.
Brent crude, the global oil benchmark, plummeted 3.19 per cent to $69.20 per barrel in futures trade as US President Donald Trump announced that Iran and Israel agreed to a ceasefire.
At the interbank foreign exchange, the local unit opened at 86.07 against the US dollar and traded in the range of 85.91-86.27 before closing at 86.03 (provisional), up 75 paise from its previous close.
The rupee had plunged 23 paise to close at a five-month low of 86.78 against the US dollar on Monday.
Anuj Choudhary, Research Analyst at Mirae Asset Sharekhan, said the rupee gained on improved global risk sentiments on reports of a ceasefire between Israel and Iran.
Also, Choudhary said a sharp decline in crude oil prices and positive domestic markets favoured the rupee, while the dollar index softened amid the ceasefire reports.
Going forward, he said, traders may take cues from US consumer confidence and Federal Reserve Chair Jerome Powell's testimony. "USD-INR spot price is expected to trade in a range of ₹85.60-86.40."
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.48 per cent lower at 97.94.
In the domestic equity market Sensex rose 158.32 points to settle at 82,055.11, while Nifty climbed 72.45 points to 25,044.35.
Foreign institutional investors (FIIs) offloaded equities worth Rs 1,874.38 crore on a net basis on Monday, according to exchange data.