The rupee appreciated by 5 paise to 75.46 against the US dollar on Wednesday as fiscal stimulus by the government bolstered investor sentiment.
Forex traders said Prime Minister Narendra Modi's Rs 20 lakh crore economic stimulus package enthused investors.
However, risk sentiments are negative and investor sentiments remain fragile over coronavirus concerns, they added.
At the interbank foreign exchange, the rupee opened on a strong note at 75.31 but lost most of its gains in day trade.
The local currency settled at 75.46 against the US dollar, registering a rise of 5 paise over its previous close. During the trading session rupee witnessed an intra-day high of 75.30 and a low of 75.50.
In a big push to revive the coronavirus-hit economy, the Prime Minister on Tuesday announced massive new financial incentives on top of previously announced packages for a combined stimulus of Rs 20 lakh crore.
"The surprise move of fiscal stimulus by the government had a positive impact on the rupee. However, globally, risk sentiments are negative and we have no clarity over the government expenditure plan," Emkay Global Financial Services Head of Research- Currency Rahul Gupta said.
Gupta further noted that "positive comments by Finance Minister Nirmala Sitharaman may cheer the rupee but it will be short-lived as the fragility over coronavirus still continues".
"On first sight, the size of fiscal stimulus and reforms on 4Ls (land, labour, liquidity and law) looks large and better than estimates, but as they say devil will be in the details. Market players eagerly awaited details of the package from Finance Minister Nirmala Sitharaman," said Devarsh Vakil, Head Advisory, HDFC Securities.
On the domestic equity market front, after rallying 1,474.36 points during the day, the 30-share index surrendered some early gains to settle 637.49 points or 2.03 per cent higher at 32,008.61. Similarly, the NSE Nifty jumped 187 points, or 2.03 per cent, to finish at 9,383.55.
Foreign institutional investors were net sellers in the capital market, as they offloaded equity shares worth Rs 1,662.03 crore on Tuesday, according to provisional exchange data.
In India, the death toll due to COVID-19 rose to 2,415 and the number of cases climbed to 74,281 on Wednesday, according to the health ministry.
The number of cases around the world linked to the disease has crossed over 42.62 lakh and the death toll has topped 2.91 lakh.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.03 per cent down at 99.90.
Brent crude futures fell 1.07 per cent to USD 29.66 per barrel.
The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 75.7944 and for rupee/euro at 81.9560.
The reference rate for rupee/British pound was fixed at 93.4024 and for rupee/100 Japanese yen at 70.52.