The rupee shot up to end at a nearly 2-1/2 year high of 63.48, surging by 20 paise against the US dollar as the bullish momentum continued strongly for the fourth-straight day driven by upbeat hopes on macro front.
Extremely bearish greenback sentiment has been one of the key factors driving the rupee higher at this juncture.
Besides, heavy dollar unwinding by speculative traders and exporters further supported the strong run-up to its multi-year highs.
This is the best closing for the home currency since July 17, 2015 when it had closed at 63.47.
Abundant capital inflows on hopes of more reform measures along with robust domestic macro fundamentals largely supplemented further strength to the local currency.
At the Interbank Foreign Exchange (forex) market, the rupee resumed slightly positive at 63.65 from overnight close of 63.68.
But, soon it encountered resistance and retreated sharply to touch a low of 63.77 due to stray dollar demand from importers and foreign banks.
However, overcoming the initial volatility, the local unit bounced back sharply to hit an intra-day high of 63.43 in mid-afternoon deals before ending at 63.48, showing a smart gains of 0.20 paise, or 0.31 per cent.
In the last four-day rally, the rupee has appreciated by a whopping 67 paise against the American currency.
The RBI, meanwhile, fixed the reference rate for the dollar at 63.6728 and for the euro at 76.5856.
The 'feel good' factor and the relative political stability improved the perception about India's economic growth prospects among foreign investors.
The Indian economy made significant headway and has grown at a stronger 6.3 per cent pace on year-on-year in the second-quarter of 2017.
In the meantime, eight core sectors expanded at a fastest pace in more than a year at 6.8 per cent in November 2017 on account of robust performance in segments like refinery, steel and cement, official data showed overnight.
Meanwhile, equity markets reversed early strong gains ended mixed in a listless trade marked by modest profit-taking in some sectors and also absence of any major trigger on the domestic front.
Investors' caution due to expensive valuations ahead of Q3 earnings also kept sentiment little shaky.
Indian shares started off the new year on a weak footing, after ending 2017 on a fabulous note.
The flagship Sensex closed little changed at 33,812.26 but broader Nifty regained 7 points to 10,442.20.
Globally, the US dollar languished near a three-month low against its major trading partners, as global markets reopened after new year holiday.
The dollar index, which measures the greenback's value against a basket of six major currencies, was down at 91.53 in early trade.
In cross-currency trades, the rupee fell back against the pound sterling to settle at 85.96 per pound from 85.91 and drifted sharply against the euro to finish at 76.61 compared to 76.40 on Monday.
The home unit also declined against the Japanese yen to close at 56.58 per 100 yens from 56.52 on Monday.
Elsewhere, pound sterling continued to trade near three-month high against the US dollar, though the advance was interrupted by a softer-than-expected UK Markit manufacturing PMI.
The euro traded close to its highest level in three years against a broadly weaker dollar, the first trading day of 2018.
In forward market on Tuesday, premium for dollar declined due to sustained receiving from exporters.
The benchmark six-month premium payable in June edged down to 136-138 paise to 138-140 paise and the far forward December 2018 contract also eased to 273-275 paise to 274.50-276.50 paise previously.