The rupee surged by 79 paise on Friday -- its biggest single day gain so far this year -- to settle at one-month high of 65.67 against the US dollar on heavy selling of greenback after worries over US interest rates hike abated.
The US Federal Reserve's decision to keep interest rates at historic lows predominantly triggered a relief rally across the emerging financial and currency markets.
Besides, a smart rally in local equities lifted market sentiments.
The local currency was largely supported by easing current account deficit worries amidst strong domestic macro-economic fundamentals along with a sharp fall in inflation.
India's current account deficit narrowed to 1.2% of GDP at $6.2 billion in the June quarter on contraction in trade deficit and higher earnings from services exports.
The domestic unit resumed firmly higher at 66.15 as against Wednesday's closing of 66.46 at the Interbank Foreign Exchange (Forex) market and kept moving higher following heavy dollar unwinding by foreign banks and speculative traders before concluding at 65.67, showing a healthy gain of 79 paise, or 1.19%.
It had touched this level on August 21 this year. The Reserve Bank of India fixed the reference rate of the rupee at 65.9255 against the US dollar.
The dollar is mostly holding its overnight losses, following the Fed's decision.
The US central bank kept interest rates unchanged at 0-0.25%, citing concerns over recent global economic developments, against the backdrop of economic slowdown in China.
The US dollar index, which measures the greenback's strength against a trade-weighted basket of six major currencies, was down by 0.21% at 94.43. Meanwhile, the benchmark BSE Sensex zoomed by 254.94 points, or 0.98%, to close at 26,218.91.
In forward market on Friday, premium for dollar recovered on fresh receivings from exporters.
The benchmark six-month premium payable in February rose to 190.5-192.5 paise from the Wednesday's level of 189.5-191.5 paise and far forward August 2016 contracts also moved up to 406-408 paise from 402-404 paise.
The RBI fixed the reference rate for the dollar at 65.9255 and for the euro at 75.1287.
The rupee slipped against the pound sterling to close at 102.58 as against Wednesday's level of 102.49 and also moved down against the euro to 75.04 from 74.58 previously.
However, it gained further against the Japanese currency at 55.11 per 100 yen.