The US Federal Reserve's surprise decision on retaining its stimulus programme helped the rupee surge 161 paise on Thursday and end at a more than one-month high of 61.77 against the dollar.
A sharp rise in local equities, capital inflows and fresh dollar sales by exporters and some banks in the wake of a weak US currency overseas also aided the rupee's surge.
The Fed unexpectedly kept its $85 billion bond-buying programme intact, making available liquidity for investing in emerging market assets, including local equities and bonds, and easing concerns about immediate capital outflows.
At the interbank foreign exchange market, the rupee started strong at 61.70 to the dollar from the previous close of 63.38 and moved between 61.64 and 62.10 before ending at 61.77, a level not seen since August 16.
The gain of 161 paise, or 2.54 , was the biggest since August 29, when it rose 225 paise or 3.27% .
The Fed decision sent the benchmark Sensex zooming over 684 points, or 3.43% , to end above the 20,000-mark at an almost three-year high of 20,646.64.
Foreign institutional investors picked up shares worth a net Rs 3,543.84 crore today, as per provisional data with the stock exchanges.
The dollar index was down by 0.15% against a basket of six major global currencies.
The Fed's decision, along with the recent rise in the rupee, may give new RBI Governor Raghuram Rajan some room to manoeuvre monetary policy as he seeks to strike a balance between boosting economic growth and containing inflation.
"Post the Fed announcement, what can be expected from the new RBI Governor is a rollback of some of the recent measures to curb liquidity in defence of the rupee," said Amar Ambani, head of research at IIFL. "However, we see no change in repo rates."
Forward dollar premiums dropped further on persistent receipts by exporters.
The benchmark six-month forward dollar premium payable in February dipped to 236-241 paise from the previous close of 253-258 paise and far-forward contracts maturing in August tumbled to 437-442 paise from 459-464 paise.
The RBI fixed the reference rate for the dollar at 61.7480 and for the euro at 83.5460.
The rupee recovered sharply to 99.36 against the pound from 101.20 previously and bounced back against the Japanese yen to 62.48 per 100 yen from 64.01.
It was up at 83.70 per euro from Wednesday's close of 84.62.