Breaking its nine-day slide – the longest since 2007 – the rupee turned around in style against the dollar to close at 67.33 after selling in the US currency by exporters accelerated.
The domestic unit rebounded from its two and a half month low with an impressive 42-paise gain - its sharpest single-day jump in over two months.
Heavy selling in the greenback by exporters and banks amid its weakness against other currencies overseas and a spectacular rally in local equities supported the recovery momentum.
Suspected RBI (Reserve Bank of India) intervention through state-owned banks also kept it cheery, a forex dealer said.
At the Interbank Foreign Exchange (Forex) market, the rupee resumed on a firm footing at 67.63 against its overnight close of 67.75 and maintained its rising trend to hit an intra-day high of 67.31 before settling at 67.33, a solid gain of 42 paise, or 0.62%.
Meanwhile, RBI fixed the reference rate for the dollar at 67.44 and euro at 75.20.
In cross-currency trades, the rupee bounced back against the pound sterling to end at 98.85 from 98.98 on Tuesday.
It also regained some ground against the euro and closed at 75.03 compared with 75.73 and recovered against the yen to settle at 61.13 per 100 yens as against 61.80 on Tuesday.
Meanwhile, foreign portfolio investors (FPIs) remained sellers as they net sold shares worth Rs 815.53 crore on Tuesday, according to provisional data from stock exchanges.
On the global front, the dollar hit a two-month high against a basket of currencies after robust US housing data supported the case for the Fed to raise rates in the near term, but gave up gains against the euro on relief that there was progress in Greek bailout talks.
The dollar index, which tracks the world's reserve currency against a basket of its peers, is down by 0.06% at 95.53.
In forward market, premium for the dollar displayed a marginal improvement.
The benchmark 6-month premium for October inched higher to 179-1/2-181-1/2 paise from 179-181 paise and far forward April 2017 contract also moved up to 378-380 paise compared to 377-379 paise earlier.
In the meantime, Indian markets staged a strong comeback and jumped more than 2% as sentiment turned buoyant after a private weather forecaster predicted more monsoon rains than initially estimated amid growing confidence of economic recovery backed by a slew of strong earnings.
The flagship index Sensex shot up by 576 points to close at 25,881.17 while the broader Nifty galloped by a whopping 186 points to close above the 7,900 mark.