The rupee appreciated 6 paise to settle at 82.95 (provisional) against the US dollar on Tuesday, amid robust equity market sentiment and a weak American currency.
Forex traders said, sustained outflow of foreign funds capped a sharp gain in the domestic currency.
At the interbank foreign exchange market, rupee unit opened at 83.02 and touched the intraday high of 82.91 against the greenback.
The local unit finally settled at 82.95 (provisional) against the dollar, registering a gain of 6 paise from its previous close.
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On Friday, the rupee settled 4 paise higher at 83.01 against the US dollar.
The currency market was closed on Monday on account of Chatrapati Shivaji Maharaj Jayanti.
Jateen Trivedi, VP Research Analyst, LKP Securities, said the rupee strengthened as the dollar index weakened.
"Additionally, a minor correction in crude prices after a strong rally provided support to the rupee. The financial sector's uptrend, evidenced by a 1.25 per cent gain in the Bank Nifty index, attracted fund inflows, further bolstering the rupee. Rupee's long consolidation persists within the range of 82.80-83.15," Trivedi said.
The dollar index, which gauges the greenback's strength against a basket of six currencies, was 0.10 per cent lower at 104.07.
Brent crude futures, the global oil benchmark, declined 0.59 per cent to $83.07 per barrel.
On the domestic equity market front, Sensex advanced 349.24 points, or 0.48 per cent, to settle at 73,057.40 points. The Nifty climbed 74.70 points, or 0.34 per cent, to 22,196.95 points.
Foreign Institutional Investors (FIIs) were net sellers in the capital markets on Monday as they offloaded shares worth ₹754.59 crore, according to exchange data.