Analysts said the domestic unit gained following the weakening of the American dollar vis-a-vis other currencies overseas. The dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.08 per cent to 98.92.

However, rising crude oil prices and foreign fund outflows weighed on local currency, analysts added.

Brent crude futures, the global oil benchmark, rose 0.21 per cent to trade at $58.38 per barrel.

The S&P BSE Sensex and NSE Nifty 50 indices rebounded after falling the most since July 8 in the previous session led by a rally in banking, metal and financial services shares. The Sensex rose as much as 367 points from day's lowest level and the Nifty 50 index briefly moved above its important psychological level of 10,850.

Foreign institutional investors (FIIs) remained net sellers in the capital market, pulling out Rs 2,016.20 crore on Tuesday, according to provisional exchange data.

According to news agency Reuters report, rupee is Asia's worst performing currency this year after the Korean won and the yuan. It has logged a fall of about 3.4 per cent so far.

On Friday, the local currency came under pressure after official data released on Friday showed that Gross Domestic Product or GDP growth fell to an over six-year low of 5 per cent in the June quarter.

According to government data, the growth of eight core industries dropped to 2.1 per cent in July, mainly due to contraction in coal, crude oil and natural gas production.

IHS Markit India Manufacturing Purchasing Managers' Index (PMI) showed that the country's manufacturing sector activity declined to its 15-month low in August.