The rupee appreciated 8 paise to close at 81.53 (provisional) against the US dollar on Friday amid a firm American currency against major rivals overseas.
However, heavy selling pressure in the domestic equity markets and unabated foreign fund outflows restricted the gains in the local currency, forex traders said.
At the interbank foreign exchange market, the rupee opened stronger at 81.51 to a dollar. The local unit moved in the range of 81.50 to 81.67 during the day.
It finally settled at 81.53, a rise of 8 paise against the previous close of 81.61.
On Wednesday, the rupee had slipped 2 paise against the US dollar.
The currency markets were closed on Thursday on account of Republic Day.
Meanwhile, the US dollar index, which gauges the greenback's strength against a basket of six currencies, rose 0.02 per cent to 101.82 after positive macroeconomic data released by the US government on Thursday.
Brent crude was trading 1.19 per cent higher at USD 88.51 per barrel.
On the domestic equity market front, the 30-share BSE Sensex tanked 874.16 points or 1.45 per cent to end at 59,330.90. Similarly, the broader NSE Nifty declined 287.60 points or 1.61 per cent to 17,604.35.
Foreign Institutional Investors (FIIs) remained net sellers in the capital market on Wednesday as they sold shares worth Rs 2,393.94 crore, according to exchange data.