The rupee jumped 0.63% to a session-high of 81.92 per dollar and also closed at that level, its highest since Oct. 3. The currency has gained 1.2% over the past two sessions.
Barring the Chinese yuan, Asian shares and currencies extended their gains into a second day, with Indian stocks eventually moving higher after a choppy session.
The dollar index lost steam to trip 0.3% to 110.40, with the risk-sensitive sterling pound's 0.8% gain weighing the most.
Traders said the dollar's rally had started to look stretched and would likely not be as intense as it had been after September.
As markets start to factor in the Federal Reserve's terminal rate, the dollar's upside could be capped and allow the rupee to correct meaningfully, a foreign exchange trader at a bank said.
Risk assets even shrugged off the yuan's decline after the world's second-biggest economy reported a drop in October exports and missed estimates.
Moreover, Chinese authorities over the weekend denied they were considering easing their strict COVID-19 policy, rumours of which had boosted Asian assets on Friday.
"While the rupee might find some support this week, the rise in oil prices and any upside surprises on U.S. inflation later in the week might limit gains," HDFC Bank economists warned in a note.
Oil prices were at $98.33 per barrel, hovering dangerously close to the $100-level. Rising oil prices could be detrimental to the rupee as India is a major oil importer with a ballooning trade deficit.
(Reporting by Anushka Trivedi in Mumbai; Editing by Savio D'Souza)
By Anushka Trivedi
