The rise in value came after the Reserve Bank of India eased pressure in the currency market by allowing state-run oil refiners to buy foreign exchange.
"The decision is aimed at removing a major source of dollar demand from the spot market," said Abhishek Goenka, CEO of India Forex Advisors. "The sustainability of this measure will be closely watched as the central bank had taken a similar measure in 2008, which provided short-lived relief."
The RBI announced Wednesday night that PSU oil companies would be allowed to buy dollars through a special swap window effective immediately.
The rupee opened at 66.90 to a dollar Thursday morning and ended at 66.55 after a few ups and downs throughout the day, a rise of 225 paise or 3.27 percent.
The rupee's decline has reportedly caused a panic in the country even prompting Prime Minister Manmohan Singh to concede that the country is facing a "difficult" economic situation. He is due to give a statement on the matter on Friday.