The domestic unit resumed higher at 61.26 per dollar as against yesterday's closing level of 61.36 at the Interbank Foreign Exchange (Forex) Market.
It hovered in a range of 61.2475 per dollar and 61.3700 per dollar before concluding the day at 61.31 per dollar, a gain of five paise or 0.08 per cent. It has gained 52 paise, or 0.84 per cent, in three days.
Today's rupee closing is the strongest since 61.1 on October 13.
Exporters and banks preferred to reduce their dollar positions in view of good foreign capital inflows into equity market amid government announcing a slew of reforms.
In New York, the US dollar ended steady yesterday as foreign exchange markets braced for a batch of Chinese economic indicators amid lingering investor worries over signs of a slowdown in Asia's economic powerhouse and global growth.
Weekend comments from members of the U.S. Federal Reserve also appeared to cement the view that the central bank will not hurry in raising rates.
Meanwhile, the Indian benchmark Sensex rose by 145.80 points, or 0.55 per cent, to end at 26,575.65.
Pramit Brahmbhatt, Veracity Group CEO, said: "Rupee appreciated mostly in morning session taking cues from local equities which traded positive for the day. However the dollar index surge in afternoon session above USD 85.20 level, dented the rupee appreciation to some extent."
In the forwards market, premium dropped further on good receipts from exporters.
The benchmark six-month premium payable in March declined to 199-201 paise from 208-210 paise previously.
Far-forward contracts maturing in September, 2015 also moved down to 414.5-416.5 from 429.5-431.5 paise.
The Reserve Bank of India fixed the reference rate for dollar at 61.2967 and for the Euro at 78.5885.
The rupee declined against the pound to 99.05 from 98.99 yesterday while improved further to 78.18 per euro from 78.42 per euro. It eased to 57.43 per 100 yen from 57.41 yesterday.