On Wednesday, the rupee had appreciated by 40 paise.
The rupee on Thursday resumed slightly lower at 63.20 per dollar as against last closing level of 63.17 at the interbank foreign exchange market on dollar demand from banks.
However, the currency recovered immediately to 62.58 on fresh selling of dollars by banks and exporters before ending at 62.67 per dollar - a net gain of 50 paise, or 0.79 per cent. This is its strongest closing since December 12, when the Indian currency had finished at 62.29.
The rupee has now gained by 90 paise, or 1.42 per cent, in two straight days.
The gains came even as the dollar index was up by 0.59 per cent against a basket of six major global rivals.
Upbeat US data lifted the dollar against its rivals.
The Sensex ended higher by 365.89 points, or 1.36 per cent, to 27,274.71. This triggered hopes of fresh inflows in both equities and debt, boosting the rupee.
"According to market sources, a large UK-based bank may have sold close to $3 billion on behalf of its exporter clients," Admisi Forex India director Suresh Nair said.
In the London Market, the euro dipped to the lowest level against the dollar since 2005 on Thursday, after weak German manufacturing data strengthened the case for the European Central Bank to launch more stimulus measures.
Meanwhile, premia softened further on sustained receipts by exporters. The benchmark six-month premium payable in June eased to 218-220 paise from 221.5-223.5 paise on Wednedsay.
Premium on forward contracts maturing in December also moved down further to 421-423 paise from 424-426 paise.
The Reserve Bank of India fixed the reference rate for dollar at 62.9670 and at 74.4270 for euro.
The rupee rallied to 94.43 from 95.53 against the pound previously and moved up further to 73.79 per euro from 74.76 on Wednesday.
It also strengthened to 52.30 per 100 Japanese yen compared to 53.02 on Wednesday.