The rupee added 65 paise to close at a one-month high of 62.83 against the dollar on Tuesday on hopes Sebi's steps to ease investment norms for overseas entities in government debt would attract more capital flows.
Bankers and exporters preferred to reduce their dollar positions on expectations more foreign capital would flow into the equity market.
In the global markets, the dollar was weaker after reports that former US Treasury Secretary Larry Summers had withdrawn from the race to be the next Federal Reserve chief.
The rupee opened at 63.70 per dollar from 63.48 on Friday at the interbank foreign exchange market. It recovered to 62.45 before ending at 62.83 per dollar, a gain of 65 paise or 1.02%. It was the highest level for the rupee since closing at 61.65 on August 16.
"Market regulator Sebi's decision to do away with the debt auction mechanism for FIIs investment is a welcome step and its reflection we have seen on the rupee," said Anindya Banerjee, a currency analyst at Kotak Securities. "Global markets are less risk averse now, that is also helping the rupee."
The rupee's gains were trimmed after the government said wholesale price inflation for August came in at 6.1% from 5.79% in July, raising concerns the central bank would find it difficult to lower interest rates.
New RBI Governor Raghuram Rajan will review the monetary policy on September 20 amid expectations the rupee's recovery from an all-time low of 68.85 on August 28 would help to unwind some liquidity-tightening measures introduced by the central bank to curb exchange rate volatility.
The government is seeking to revive economic growth and curb the fiscal and current account deficits.
In London, Brent crude fell as much as USD 2.97 to USD 108.73 a barrel after a deal to avert a military strike on Syria.
The 30-share S&P BSE Sensex index ended 9.71 points higher at 19,742.47.
Forward dollar premiums were mixed. The benchmark six-month forward dollar premium payable in February eased to 257-1/2-262-1/2 paise from Friday's close of 258-263 paise while far-forward contracts maturing in August edged up to 462-467 paise from 461-466 paise.
The RBI fixed the reference rate for the dollar at 62.4840 and for the euro at 83.4960.
The rupee was at 100.08 against the pound from 100.32 previously and hardened to 83.92 per euro from 84.34.
It improved against the Japanese yen to 63.55 per 100 yen from 63.66.