The currency rose 0.8% to 49.0750 per dollar, the biggest gain since December 1, 2010. It has fallen 8.9 Sensex snapped a four-day decline after a central bank official from Europe, who spoke on condition of anonymity, said the European Central Bank will likely consider restarting covered-bond purchases along with further measures to ease monetary conditions.
The news out of Europe has provided some comfort that a solution to the turmoil, albeit buying time, can be achieved, said Krishnamurthy Harihar, treasurer at FirstRand in Mumbai.
The rupee has weakened 9% this quarter. Wholesale-price inflation accelerated to a 13-month high of 9.78% in August, official data show.
Meanwhile, Reserve Bank of India governor Duvvuri Subbarao said in New York that inflation remains above the level the central bank deems acceptable, signaling pressure remains for further monetary tightening.
Offshore forwards indicate the rupee will trade at 49.78 to the dollar in three months, from expectations of 50.32 on Monday. Forwards are agreements to buy or sell assets at a set price and date.