The rupee appreciated by 6 paise to close at 73.49 against the US dollar on Monday, following a rally in stock markets and weakness in the American currency.
The sustained foreign fund inflows also supported the rupee, traders said.
At the interbank forex market, the domestic unit opened at 73.52 against the US dollar and witnessed an intra-day high of 73.47 and a low of 73.61.
The local unit finally settled at 73.49 against the American currency, registering a rise of 6 paise over its previous close.
On Thursday, the rupee had settled at 73.55 against the US dollar. Forex and equity markets were closed on Friday for Christmas.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, slipped 0.25 percent to 89.99.
On the domestic equity market front, BSE Sensex ended 380.21 points or 0.81 percent higher at 47,353.75, while the broader NSE Nifty jumped 123.95 points or 0.9 per cent to 13,873.20.
"Indian Rupee appreciated on weakness in Dollar and surge in stock markets. Market sentiments improved as US President Donald Trump signed USD 2.3 trillion coronavirus relief aid and spending package and as the UK and European Union secured trade agreement," Saif Mukadam, Research Analyst, Sharekhan by BNP Paribas, said.
However, the sharp gain was prevented amid worries over rising coronavirus cases across the globe and emergence of a new strain of COVID-19 in the UK, Mukadam added.
Traders fear that strict restrictions on social and business activity would hamper global economic recovery. Foreign institutional investors were net buyers in the capital market as they purchased shares worth Rs 1,225.69 crore on a net basis on Thursday, according to provisional exchange data.
Brent crude futures, the global oil benchmark, rose 1.31 percent to USD 51.96 per barrel.
"INR was trading marginally stronger against the US currency on-demand from importers and the weak dollar index. Asian shares and US futures were trading higher and the dollar index dropped below 91.20 after US President Donald Trump signed a coronavirus relief package," said Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities.
Vakil further noted that "rupee has come near strong support zone of 73.4 to 73.5. We expect lacklustre trading for the remaining days of the week till year-end as most currency markets will have lower volumes and lower presence of participants".
The rupee's range-bound moves came despite the broad dollar decline amid firm risk appetite, said Sriram Iyer, Senior Research Analyst at Reliance Securities.
"The volumes are quite low and the price action is quite lethargic. There is a bit of dollar demand from banks who are known to have importer flows and there are exporter orders at higher levels on the flow," Iyer said.
Iyer further said that "we expect this kind of range-bound trading most of this week. We reckon there will be a bit of action tomorrow when the December USD/INR futures contract expires".
The USD/INR December contract traded on the NSE and BSE expires at noon tomorrow. The high open interest on the contract amid regular intervention by the Reserve Bank of India could prompt volatility on spot OTC near to the daily fixing, Iyer added.
First Published: IST