Snapping its two-day losing streak, the rupee rose by 8 paise to close at 76.56 against the US dollar on Tuesday following a rebound in regional currencies and expectations of foreign fund flows as the LIC IPO is likely to hit markets early in May.
A fall in crude oil prices also aided gains in the local unit.
However, the appreciation bias in the local unit will be capped in the near term amid fears about the economic impact of China's COVID-19 lockdowns and an aggressive pace of the US rate hikes, traders said.
At the interbank forex market, the rupee opened at 76.48 against the greenback and moved in a range of 76.43 to 76.69 in the day trade. The rupee finally closed at 76.56, higher by 8 paise over its previous close of 76.64.
Analysts said a rally in the stock markets and news of LIC IPO hitting the market during the first week of May supported the rupee.
"Indian rupee inched up after two days of sharp sell-off following a rebound in regional currencies and domestic equities. The fall in crude oil and commodity prices and expectations of foreign fund inflows from LIC IPO supported the rupee," said Dilip Parmar, Research Analyst, HDFC Securities.
However, the local unit is still not out of the woods as strength in the dollar against major currencies, weaker economic growth, and higher inflation are likely to limit the gains.
"Broadly, spot USDINR is expected to trade in the range of 76 to 77 while near term directions will be followed by risk moods and movement in Chinese yuan," Parmar said.
"LIC IPO is expected to attract foreign capital inflows, which will be supportive for the rupee. Therefore, on one hand, a strong US Dollar Index will keep USDINR above 76 but on the other hand, LIC IPO and RBI intervention will keep the upside capped near 76.80 levels on spot.
"We expect a broad range of 76 and 76.80 on spot," said Anindya Banerjee, VP, Currency Derivatives & Interest Rate Derivatives at Kotak Securities Ltd.
Jateen Trivedi, Senior Research Analyst at LKP Securities said, "Rupee traded in the range of 76.45-76.65 with positive moves compared to yesterday. Positive update on LIC IPO coming soon also helped inflows in the capital market giving strength to the rupee."
On the domestic equity market front, the BSE Sensex ended 776.72 points or 1.37 per cent higher at 57,356.61, while the broader NSE Nifty jumped 246.85 points or 1.46 per cent to 17,200.80.
Brent crude futures, the global oil benchmark, fell 0.49 per cent to USD 101.82 per barrel.
The dollar index, which gauges the greenback's strength against a basket of six currencies, surged 0.06 per cent to 101.81.
Foreign institutional investors were net sellers in the capital market on Tuesday as they offloaded shares worth Rs 1,174.05 crore, as per stock exchange data.