Brushing aside initial volatility, the rupee made a strong comeback by recovering 18 paise against the US dollar to end at a fresh one-week high of 64.89 on late selling of the greenback by exporters and corporates.
Forex market witnessed a sudden revival in sentiment towards the tail-end session following government's Rs 2.11 lakh crore recapitalisation plan to bolster NPA-hit public sector banks.
Initially, rupee reacted negatively on heightened concerns that capital infusion into banks over the next two years via recap bonds and other means could push up the government expenditure and fiscal deficit.
In path-breaking move in addressing the country's bad loans problem, Finance Minister Arun Jaitley on Tuesday unveiled an unprecedented Rs 2.11 lakh crore two-year roadmap for strengthening state-controlled lenders.
The expectation of strong reform push by the government and robust capital inflows against the backdrop of a stellar rally in local equities apparently uplifted the trading mood, a forex dealer commented.
The rupee opened on a weak note at 65.14 against Tuesday's close of 65.07 at the Interbank Foreign Exchange (Forex) market on the back of heavy dollar demand and drifted further to 65.20.
After trading in a tight range with negative bias during most part of the session, the local unit made sharp reversal to recuperate all early losses and managed to end at the day's highest level of 64.89, showing a smart gain of 18 paise, or 0.28 per cent.
It had settled lower by 5 paise yesterday.
Meanwhile, domestic bourses powered ahead to their historic-highs in a breathtaking rally spearheaded by PSU bank stocks as market sentiment got a sudden boost following the announcement of the bank recapitalisation plan.
The RBI, meanwhile, fixed the reference rate for the dollar at 65.1386 and for the euro at 76.5900.
On the global front, the US dollar continued to trade higher against a basket of the other major currencies on the report that Republican senators were leaning towards John Taylor to be the next Federal Reserve chief amid hawkish Fed rate hike bets.
The dollar index, which measures the greenback's value against a basket of six major currencies, was down modestly at 93.74 in early trade.
In cross-currency trades, the rupee dropped further against the Pound sterling to finish at 85.99 from 85.69 per pound, but recouped against the Euro to end at 76.39 from 76.54 yesterday.
The local unit also bounced back against the Japanese yen to settle at 56.88 per 100 yens compared to 57.21 earlier.
Elsewhere, the pound sterling rebounded sharply against the dollar following the release of better than expected UK third-quarter GDP, while euro traded pretty much flat.
In forward market today, the premium for dollar showed a lacklustre trade owing to lack of market-moving factors.
The benchmark six-month premium payable in March ended little changed at 117-119 paise from 117.50-119.00 paise, but the far forward September 2018 contract edged up to 257-259 paise from 256.50-258.50 paise yesterday.
On the International energy front, global crude prices eased marginally, but was still trading its near a four-week high after top exporter Saudi Arabia said it was determined to end a supply glut that has been weighing on the market for three years.
Brent crude futures were down 20 cents at $58.13 a barrel in early Asian trade.
US West Texas Intermediate crude was trading down 27 cents at $52.20.