Increased portfolio investments by foreign funds and weak dollar overseas, too, lifted the market sentiment, forex dealers said.
The rupee resumed strong at 61.04 a dollar from previous close of 61.21 but immediately touched a low of 61.13 at the Interbank Foreign Exchange (Forex) market.
However, it later bounced back to close at day's highest level of 60.76, a net rise of 45 paise or 0.74 per cent. It is the rupee's highest closing level since 60.55 on July 31.
It is also the rupee's best single-day gain since May 16 this year, when it had risen by 50 paise, or 0.84 per cent.
"This has been a mixed week for the rupee, as it was range bound during initial sessions but ended on a positive note. Geopolitical tensions in Ukraine, US data and India's inflation numbers were the main triggers for the rupee in this week.
"Today, strength in Asian currencies, slight weakness in the US dollar and positive domestic markets were seen supporting the rupee," said Abhishek Goenka, founder and CEO, India Forex Advisors.
The BSE Sensex closed over 184 points higher to close at a 3-week high of 26,103.23. Foreign Institutional Investors (FIIs) pumped in Rs 625.18 crore into domestic equities today, according to provisional stock exchange data.
The dollar index, consisting of six major global rivals, was down by 0.08 per cent.
Meanwhile, inflation as measured by Wholesale Price Index (WPI) dropped to five-month low of 5.19 per cent in July.
Pramit Brahmbhatt, Veracity Group CEO said, "Today rupee closed strong. Positive sentiments in the market have boosted the confidence of the investors. This helped local indices to close up on a positive note. The trading range for the spot rupee for Monday is expected to be within 60.30 to 61.30."
In the forward market premium moved down further on continued receipts by exporters.
The benchmark six-month premium payable in January eased to 227-231 paise from 230-232 paise previously.
Far-forward contracts maturing in July, 2015 declined to 473-475 paise from 476-478 paise.
The Reserve Bank of India fixed the reference rate for dollar at 61.0583 and for the euro at 81.5552.
The rupee shot up further against the pound to 101.34 from 102.24 yesterday while recovered against the Japanese yen to 59.34 per 100 yen from 59.76.
It also recouped against the euro to 81.27 from overnight close of 81.78.
Forex market will remain closed tomorrow on account of Independence Day.