The rupee opened higher at 61.65 per dollar as against the yesterday's closing level of 61.80 at the Interbank Foreign Exchange (Forex) market.
It moved up further to 61.61 per dollar on initial selling of dollars by banks.
However, it fell to 61.84 per dollar in the afternoon on fresh demand from some banks before closing at 61.67 per dollar, showing a gain of 13 paise or 0.21 per cent from its last close.
The rupee has now gained by 19 paise, or 0.31 per cent, in two days and has closed at its strongest level since 61.41 on January 28, 2015.
The local currency moved in a range of 61.61 per dollar and 61.84 per dollar during the day.
"Foreign inflows and hopes of rates cuts in the future continued to support the local currency.
Foreign investors were net buyers of $120.68 million in Indian markets yesterday and purchased a total $6.818 billion in 2015," said Admisi Forex India, Director, Suresh Nair.
The Reserve Bank of India (RBI) earlier today left repo rate unchanged at 7.75 per cent, but cut SLR by 50 bps to 21.50 per cent from 22 per cent.
In international forex markets, the widely-tracked dollar index was down by 0.05 per cent against a basket of major global rivals.
In the Tokyo market, the dollar was lower against the yen today, with investors seeking to take profits on overnight gains in the greenback.
In the New York market, the Canadian dollar, Norwegian krone and Russian ruble rose against the US dollar yesterday as oil prices fluctuated.
Meanwhile, the Indian equity benchmark Sensex dropped by 122.13 points, or 0.42 per cent, to close at nearly two-week low fo 29,000.14.
"Some banks were selling dollars in the market which helped the rupee trade strong against the US dollar.
The trading range for the spot USD/INR pair is expected to be within 61.20 to 62.20," said Veracity Group, CEO, Pramit Brahmbhatt.
Meanwhile, the forward premia recovered sharply on fresh paying pressure from corporates.
The benchmark six-month premium payable in July ended higher at 222.5-224.5 paise from 218-220 paise yesterday and forward contracts maturing in January 2016 also rose to 428- 430 paise from 417-419 paise.
The Reserve Bank of India fixed the reference rate for dollar at 61.7389 and for Euro at 69.9378.
The rupee eased against the pound to 92.89 per pound from 92.82 per pound previously while moved up against the euro to 69.99 per euro from 70.02.
However, the rupee ended steady against the yen to 52.51 per 100 yen.
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