Continued foreign funds inflow and persistent dollar selling by exporters and some banks also boosted the rupee value, a forex dealer said.
FIIs have pumped in a total of around USD 800 million in 13 straight sessions to March 4, according to India Forex Advisors.
At the Interbank Foreign Exchange (Forex) market, the domestic unit commenced strong at 61.51 from previous close of 61.75 and immediately touched a low of 61.54.
It, later bounced back with a vengeance to a high of 61.10 in line with local equities. The rupee ended at 61.11, a sharp rise of 64 paise - the biggest daily gain since November 18, 2013 when it rose 70 paise. Previously, it had settled at 61.04 on December 10, 2013.
The Indian benchmark S&P BSE Sensex today flared up by 237 points to end at a new peak while FIIs bought shares worth USD 124.64 million yesterday as per Sebi data.
The NSE 50-issue CNX Nifty also closed at an all-time high of 6,401.15 today.
Pramit Brahmbhatt, CEO, Alpari Financial Services, (India) said: "Rupee strengthened to its highest in nearly three months taking cues from the domestic share market as the Sensex hit a record high, backed by the FII buying. Also, the country's CAD narrowing in the December quarter helped the rupee appreciate."
The US will be releasing some of the important economic reports today and tomorrow, and if they come out to be better than expected, then it might push dollar index higher putting pressure on the rupee, according to Abhishek Goenka, Founder & CEO, India Forex Advisors.
India's current account deficit fell to USD 4.2 billion, or 0.9 per cent of GDP, in December quarter of 2013-14 on the back of rise in exports and fall in gold imports, data showed yesterday.
Meanwhile, forward dollar premium ended dropped further on sustained receipts by exporters.
The benchmark six-month premium payable in August ended weak at 252-254 paise from last close of 256-257.5 paise.
Far forward contracts maturing in February 2015 also declined to 495-497 paise from 500-502 paise.
The RBI fixed the reference rate for dollar at 61.3242 and for the euro at 84.1866.
The rupee remained firm against the pound to end at 102.12 from 103.02 and also shot up to 83.97 per euro from 84.70. It spurted to 59.51 per 100 Japanese yen from 60.32.