The rupee appreciated by 27 paise to settle at 75.15 against the US dollar on Wednesday on expectations of foreign fund inflows and optimism over development of a COVID-19 vaccine.
Investor sentiment strengthened after human clinical trials for a COVID-19 vaccine were initiated in India, forex dealers said.
The rupee opened at 75.35 against the US dollar and gained further ground to touch a high of 75.14. The unit finally settled at 75.15 against the US dollar, up 27 paise over its previous close.
It had settled at 75.42 against the greenback on Tuesday.
The Indian Council of Medical Research (ICMR) on Tuesday said human clinical trials for a potential vaccine for COVID-19 have been initiated in the country with approximately 1,000 volunteers participating in the exercise for each of the two indigenously developed vaccine candidates.
The Drugs Controller General of India (DCGI) has permitted two vaccines -- one developed by Bharat Biotech International Limited in collaboration with ICMR and another one by Zydus Cadila Healthcare Ltd -- to go in for the first and second phase of human clinical trials.
"Rupee rose against the US dollar following gains in domestic and global equities as an experimental vaccine for COVID-19 showed it was safe and provoked immune responses," said Gaurang Somaiyaa, Forex & Bullion Analyst, Motilal Oswal Financial Services.
Meanwhile, the number of cases around the world linked to the disease has crossed 1.33 crore and the death toll has topped 5.78 lakh.
In India, the death toll due to COVID-19 rose to 24,309 and the number of infections spiked to 9,36,181, according to the health ministry.
The dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.40 per cent to 95.87.
The 30-share BSE benchmark Sensex settled 18.75 points, or 0.05 per cent, higher at 36,051.81. The NSE Nifty closed 10.85 points, or 0.10 per cent, up at 10,618.20, after soaring 220 points during the session.
Foreign institutional investors were net sellers in the capital market as they sold shares worth Rs 1,565.62 crore on Tuesday, according to provisional exchange data.
Brent crude futures, the global oil benchmark, rose 1.52 per cent to USD 43.55 per barrel.
Traders said that the focus will be on industrial production number that will be released from the US.
"Expectation is that the number could surprise on the upside as the economy reopens. We expect USDINR (Spot) to quote in the range of 75.05 and 75.50," Somaiyaa said.
According to Devarsh Vakil, Deputy Head Retail Research, HDFC Securities, the rupee rose along with most emerging Asian peers amid progress in the development of a COVID-19 vaccine and risk-on tones.
Vakil further said that expectation of foreign fund inflows from the running IPO and FPO added gains in the rupee. Market also pricing dollar flows from Walmart's recent infusion of USD 1.2 billion in Flipkart, he said.
US retail giant Walmart will lead a USD 1.2 billion (about Rs 9,045 crore) investment in Indian e-commerce company Flipkart to give it extra firepower to compete with Amazon and billionaire Mukesh Ambani's JioMart.
The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 75.3935 and for rupee/euro at 85.5364. The reference rate for rupee/British pound was fixed at 94.5470 and for rupee/100 Japanese yen at 70.25.