A firm dollar overseas and capital outflows from domestic equities failed to cap the rupee's gains, a forex dealer said.
At the interbank foreign exchange market, the local currency opened strong at 62.20 a dollar from the previous close of 62.30. It declined to a low of 62.27 on initial hesitancy in local equities and capital outflows.
The rupee bounced back and ended at the day's high of 62.07, a rise of 23 paise or 0.37 per cent. It was the highest level for the rupee since closing at 61.90 on January 1.
"It was a positive session for the rupee, which was seen joining the Asian currencies as majority of them were seen gaining against the US dollar," said Abhishek Goenka, CEO of India Forex Advisors.
"Yesterday's US trade data, which saw the deficit shrink markedly, laid the foundation for the rally in the USD/JPY pair," Goenka said.
The benchmark 30-share S&P BSE Sensex washed out part of its early gains and closed about 36 points higher, advancing for the first time in 2014.
Foreign institutional investors continued their selling spree and pulled out USD 85.74 million yesterday, as per Sebi data, taking the total to USD 129.31 million in the past three days.
The dollar index rose 0.17 per cent against most rivals as investors awaited the release of minutes from the Federal Reserve's December meeting later today. The European Central Bank and the Bank of England will release monetary-policy decisions on Thursday.
The US Labor Department is scheduled to release December non-farm jobs data on Friday, providing investors another indication of how the world's largest economy is faring.
"Rupee closed on a positive note. Investors are waiting for the release of minutes from the Federal Reserve's last policy meeting and an employment indicator," said Pramit Brahmbhatt, CEO of Alpari Financial Services (India).
Forward dollar premiums dropped further on persistent receipts by exporters.
The benchmark six-month forward dollar premium payable in June declined to 242-244 paise from 245-247 paise and far-forward contracts maturing in December slipped to 481-483 paise from 484-1/2 to 486-1/2 paise.
The RBI fixed the reference rate for the dollar at 62.2430 and for the euro at 84.8185.
The rupee rebounded to 101.88 against the pound from 102.33 previously and bounced back to 84.33 per euro from 85. It recovered to 59.26 per 100 Japanese yen from 59.66.