MUMBAI - The Indian rupee closed higher against the U.S. currency on Tuesday as a sharp decline in Treasury yields stoked a rally in global equities and dampened demand for the dollar.

The rupee ended at 81.52 per U.S. dollar, up from 81.8725 in the previous session. The local unit opened higher at 81.67 and reached a day's high of 81.3650.

The rupee's performance on Tuesday was broadly in line with its Asian peers. The currency of Asia's third largest economy would likely have fared better had it not been for oil prices. The December Brent crude contract rose 0.7% to $89.48, after climbing more than 4% in the previous session.

Analysts reckon that the recent choppy price action in rupee is likely to persist as the aggressive monetary policy stance of the U.S. Federal Reserve impacts portfolio flows and the dollar index.

"Since August, USDINR has been quite erratic with intra-day price action or range limited but opening gaps (up or down) quite large. Erratic movements may continue for the time being," said Anindya Banerjee, head research - forex and interest rates at Kotak Securities.

"Sudden gap ups and gap downs make it difficult to carry positions overnight."

Asian equities surged and futures indicated a more than 1% rally for U.S. shares. The fall in Treasury yields helped engineer a turnaround in risk sentiment. The 2-year Treasury yield declined to near 4% and the benchmark below 3.6%. Weaker than expected U.S. manufacturing data boosted demand for bonds.

India's equity gauge, the BSE Sensex advanced 2.3%, its best session in a month. Foreign flows into Indian equities turned negative in the last two weeks of September. Overall, overseas investors drew out $1.6 billion from Indian shares last month.

Indian equities and money markets are shut Wednesday.

(Reporting by Nimesh Vora; Editing by Dhanya Ann Thoppil)