The rupee strengthened by 38 paise to close at 69.30 against the dollar in line with firming Asian currencies and sustained foreign fund inflows, halting its three-day losing streak.
Forex traders said the dollar's weakness against its key rivals overseas and heavy buying in domestic equities also supported the domestic currency.
At the Interbank Foreign Exchange (forex) market, the domestic unit opened at 69.65. The local unit moved in a range of 69.73 to 69.21 before finally ending at 69.30, a rise of 38 paise over its previous close.
The rupee had declined by 44 paise to close at 69.67 against the dollar on Monday.
"Rupee broke the three day losing streak in today's session amid foreign fund flows in equity market and stronger Asian currencies against the dollar," said VK Sharma, Head PCG & Capital Markets Strategy, HDFC Securities.
Sharma further said "risk-on sentiment also jumped after ruling government released manifesto for general election in which they pledged to spend $1.44 trillion on infrastructure to boost economy and improve standard of living".
The dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.12 percent to 96.93.
Brent crude futures, the global oil benchmark, was trading almost flat at $71.09 per barrel. Meanwhile, foreign investors remained net buyers in the capital markets, putting in Rs 1,212.35 crore on a net basis on Tuesday, the provisional exchange data showed.
The 30-share Sensex index settled 238.69 points, or 0.62 percent, higher at 38,939.22 on Tuesday. In similar movement, the broader NSE Nifty rose 67.45 points, or 0.58 percent, to 11,671.95.
The Financial Benchmark India Private Ltd. set the reference rate for the rupee/dollar at 69.5397 and for rupee/euro at 78.3124. The reference rate for rupee/British pound was fixed at 90.9538 and for rupee/100 Japanese yen at 62.45.
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