The rupee appreciated by 12 paise to close at 81.67 (provisional) against the US dollar on Tuesday, as the American currency retreated from its elevated levels.
At the interbank foreign exchange market, the local unit opened at 81.72 and touched an intra-day high of 81.64 and a low of 81.83 against the greenback.
The local unit finally settled at 81.67, registering a rise of 12 paise over its previous close.
On Monday, the rupee depreciated by 5 paise to close at 81.79 against the US dollar.
"The Indian rupee marked the first gain in the last five days as a gauge of the dollar index halted a three-day gain after some US policymakers struck a cautious note about further aggressive tightening moves," said Dilip Parmar, Research Analyst, HDFC Securities.
Recovery in domestic equities and stronger Asian currencies also supported the rupee.
The near-term attention will be focused on the Federal Open Market Committee (FOMC) minutes due Wednesday. It may show consensus on the need to slow hikes but division on the end-point and whether to prioritise inflation or economic growth, he added.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, slipped 0.35 per cent to 107.46.
Global oil benchmark Brent crude futures advanced 0.80 per cent to USD 88.15 per barrel.
On the domestic equity market front, the 30-share BSE Sensex advanced 274.12 points or 0.45 per cent to end at 61,418.96, while the broader NSE Nifty gained 84.25 points or 0.46 per cent to 18,244.20.
Foreign Institutional Investors (FIIs) were net sellers in the capital markets on Monday as they offloaded shares worth Rs 1,593.83 crore, according to exchange data.