The rupee gained 23 paise to 84.54 against the US dollar in early trade on Thursday, as the US Federal Reserve kept the federal fund rate steady.
Forex traders said sustained foreign fund inflows and overall dollar weakness supported the local unit but geopolitical tensions continue to dent investor sentiments.
At the interbank foreign exchange, the domestic unit opened at 84.61 and fell to an early low of 84.65 and a high of 84.54 against the greenback, registering a gain of 23 paise over its previous close.
On Wednesday, the rupee depreciated 42 paise to close at 84.77 against the US dollar, as heightened cross-border tensions following India's military strikes against terrorist camps in Pakistan and Pakistan-Occupied Kashmir.
Rupee fell to 84.94 on Wednesday but closed at 84.8250 and opened slightly stronger as there was no further news overnight from the border though tensions continue to build, said Anil Kumar Bhansali, Head of Treasury and Executive Director Finrex Treasury Advisors LLP.
The volatility index has surged higher while premiums have been falling due to surplus liquidity generated from the Ongoing Open Market Operations (OMOs) being pursued by the Reserve Bank of India (RBI), Bhansali added.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading higher by 0.04 per cent at 99.65.
Brent oil was steady after falling more than USD 1 in the previous session as uncertainty over trade talks between the US and China, the world's two largest oil consumers weighed on investors' sentiments. Brent crude, the global oil benchmark, rose 0.70 per cent to USD 61.65 per barrel in futures trade.
In the domestic equity market, the 30-share BSE Sensex declined 50.00 points, or 0.06 per cent, to 80,696.78, while the Nifty fell 31.30 points, or 0.13 per cent, to 24,383.10.
Foreign institutional investors (FIIs) bought equities worth Rs 2,585.86 crore on a net basis on Wednesday, according to exchange data.
Meanwhile, the FOMC (Federal Open Market Committee), left interest rates unchanged at 4.25 per cent - 4.50 per cent band as widely expected but Jerome Powell said that it was not very clear if the economy would continue its steady pace of growth or wilt under the mounting pressure of trade uncertainty and a possible spike in inflation.
Meanwhile, a top American military commander has said that the US is “watching the situation very closely” after Indian military strikes on terror targets in PoK and Pakistan's Punjab province.
Except for the headline, this story has not been edited by The Telegraph Online staff and has been published from a syndicated feed.