The rupee made a strong recovery against the buoyant US currency to close at 65.01, surging by 17 paise on fresh bouts of dollar selling, seemingly unfazed by escalating trade tensions between the US and China.
A massive unwinding of dollar long positions by exporters and corporates predominantly lifted the forex sentiment.
Bullish performance of the local equity markets despite global stock rout further weighed on the trading mood.
Robust economic outlook marked by relatively stronger core sector activity in February, which grew 5.3 per cent, also supported the recovery momentum.
The RBI will review its monetary policy on 4-5 April.
The Indian currency suffered the worst during the first quarter of the year, plunging 2.05 per cent against the USD.
In the meantime, bond yields declined after the RBI allowed banks to spread its bond trading losses.
A strong follow-through buying interest lifted the local unit to a new intraday high of 64.99 in mid afternoon deals before ending at 65.01, revealing a rise of 17 paise, or 0.26 per cent.
It briefly touched a low of 65.13.
The RBI, meanwhile, fixed the reference rate for the dollar at 65.0240 and for the euro at 80.0901.
On the global energy front, crude prices staged a mild rebound after overnight sharp fall on growing concerns over supply glut after reports stated that Russian oil output rose in March, despite the supply cut agreement.
Brent crude futures were trading higher at USD 67.94 a barrel in early Asian trading.
Meanwhile, domestic bourses extended their relief rally for the second straight day despite a far choppier start following heavy buying activity in beaten down state-run banking counters after the Reserve Bank of India eased the provisioning norms for bond losses.
The Sensex rose over 116 points to end at 33,370.63, while Nifty jumped 33 points to 10,245.
Most Asian stocks, on the other hand ended in red spooked by an overnight sell-off on Wall Street.
Globally, the dollar traded modestly higher against a basket of currencies amid reviving fears of a full-blown US China trade war.
The dollar index, which measures the greenback's value against a basket of six major currencies, was up at 89.78 in early trade.
The rupee also showed more persistent strength against the pound sterling, euro and Japanese yen.
In the cross currency trade, the home currency bounced back against the pound sterling to end at 91.23 from 92.25 and recouped against the euro to settle at 79.94 as compared to 80.82 earlier.
The local unit also pulled back against the Japanese yen to close at 61.20 per yens from 61.49.
Elsewhere, the common currency euro recovered from Monday's selling pressure against the greenback even with the manufacturing activity in the Eurozone decelerated sharply in March.
The British pound, however, traded firmly higher against the USD after the UK manufacturing PMI report unexpectedly rose in March from downwardly revised reading in February.
In forward market today, premium for dollar edged lower due to sustained receiving from exporters.
The benchmark six-month forward premium payable in August eased to 109-111 paise from 110.50-111.50 paise and the fag-forward February 2019 contract also softened to 231-233 paise from 232.50-234.50 paise previously.