The rupee appreciated by 9 paise to close at 73.02 against the US dollar on Monday, supported by sustained foreign fund inflows and weakness of the American currency in the overseas market.
Traders said hopes of COVID-19 vaccine also improved sentiments.
India's drugs regulator on Sunday approved Oxford COVID-19 vaccine Covishield, manufactured by the Serum Institute, and indigenously developed Covaxin of Bharat Biotech for restricted emergency use in the country, paving the way for a massive inoculation drive.
At the interbank forex market, the domestic unit opened at 72.93 against the US dollar and witnessed an intra-day high of 72.90 and a low of 73.03.
The local unit finally settled at 73.02, registering a rise of 9 paise over its previous close.
On Friday, the rupee had settled at 73.11 against the American currency.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.51 per cent to 89.47.
"Indian Rupee appreciated amid weakness in Dollar and surge in stock markets. Market sentiments improved on hopes of global economic recovery from pandemic buoyed by the rollout of vaccine and extraordinary fiscal and monetary stimulus," said Saif Mukadam, Research Analyst, Sharekhan by BNP Paribas.
Further, the rupee gained strength on steady FII inflows and improved economic data, Mukadam said, adding that it may trade in the range of 72.75 to 73.55 in next couple of sessions.
The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers' Index (PMI) was at 56.4 in December, a tick higher than November's reading of 56.3 and above the critical 50 threshold for the fifth straight month.
On the domestic equity market front, the BSE Sensex ended 307.82 points or 0.64 per cent higher at 48,176.80, while the broader NSE Nifty advanced 114.40 points or 0.82 per cent to 14,132.90.
Foreign institutional investors were net buyers in the capital market as they purchased shares worth Rs 506.21 crore on a net basis on Friday, according to provisional exchange data.
Brent crude futures, the global oil benchmark, advanced 1.18 per cent to USD 52.41 per barrel.
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