The rupee strengthened to 66.04 on heavy dollar selling by banks and exporters and on the back of a rally in the domestic stock markets.
Sensex finished up 516.53 points or 2.01 per cent at 26,231.19 while the NSE Nifty added 157.10 points or 2.02 per cent to end at 7,948.95.
Sentiment was also supported by comments from New York Fed President William Dudley on Wednesday that the prospect of a September rate hike "seems less compelling" than it was only weeks ago, given the threat posed to the US economy by the recent market turmoil.
The Indian unit opened sharply higher at 65.95 per dollar against yesterday’s closing level of 66.14 at the Interbank Foreign Exchange (Forex) market.
It moved in a range of 66.14 to 65.86 per dollar during the afternoon deals to end at 66.04.
The dollar was up 0.23 per cent against the yen at 120.20 yen , and well above a seven-month low of 116.15 yen struck earlier this week. The euro, too was up 0.02 per cent at 135.71 yen, while against the dollar it was flat at $1.12, well below this week’s seven-month high of $1.1715.
The dollar index edged up to 95.40.
“Due to volatility in global markets, the likelihood of a Fed rate hike in the upcoming September meeting is fast receding. Following the PBoC action, Chinese equity sell-off has taken a breather. The US dollar has once again gained lost ground,” a dealer said.
“The USD-INR pair is expected to trade today in a range of 65.80-66.20 per dollar,” the dealer said.
Crude oil rose in Asia today as dealers digested a mixed US energy report showing a dip in crude inventories, but barely any decline in production despite sinking prices.