The Indian rupee began Tuesday on a strong note, rising 26 paise to 94.96 against the US dollar in early trade, defying expectations and bolstering Forex traders' optimism about its near-term trajectory.

Forex traders point to the USD/INR pair's apparent establishment of a strong support zone around 95.10-95.20 as a key factor behind the rupee's surge. Additionally, MSCI-related inflows have provided temporary respite to the currency.

The interbank foreign exchange market witnessed the rupee open at 95.06 against the US dollar before gaining further ground to touch 94.96. The currency had closed 21 paise higher at 95.22 on Monday, after recovering from its initial losses.

The dollar index, which measures the greenback's strength against a basket of six currencies, was trading at 99.46, up 0.03 per cent. Meanwhile, Brent crude, the global oil benchmark, rose 0.63 per cent to $91.06 a barrel in futures trade.

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The recent surge in oil prices came on the heels of US President Donald Trump's warning that the United States would "hit Iran hard" following missile attacks on American military bases in Jordan.

Despite this, domestic equities started Tuesday's session on a weaker note. The Sensex declined 121.48 points to 76,835.79 in early trade, while the Nifty fell 52.6 points to 24,027.80.

Foreign institutional investors remained sellers in the equity market, offloading shares worth Rs 7,985.88 crore on a net basis on Monday, according to exchange data.

However, foreign investors have invested around USD 3.1 billion in August, which was their strongest monthly inflow in 23 months and marked the second consecutive month of net buying.

"So, the direction has improved -- but the broader foreign-flow picture is still not completely comfortable," said CR Forex Advisors MD Amit Pabari.

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India's economic growth also provided support to the rupee. The economy expanded 7.8 per cent in the April-June quarter, beating expectations and showing resilience despite concerns that the war in Iran and the resulting global economic uncertainty could weigh on growth.

"The data is particularly noteworthy because it came during a period marked "Strong growth does not automatically strengthen a currency, but it does reinforce the perception that India's domestic economy remains resilient despite global turbulence."

The fiscal position also remained a factor in the currency market. The central government's fiscal deficit for 2026-27 stood at 26.8 per cent of the full-year target at the end of July, according to data released.