At the Interbank Foreign Exchange (Forex) market, the domestic unit opened lower at 56.14 a dollar from its previous close of 56 and soon logged an all-time low of 56.38 on sustained dollar demand from oil importers.
Soon RBI stepped in helping rupee bounce back and settling for the day at 55.65, a rise of 35 paise or 0.62 per cent.
This marks a turnaround after rupee's 158-paise plunge in the last three sessions weighed down by the deterioration in the Balance of Payments (BoP), mainly trade gap amid muted capital inflows in view of the volatile Eurozone situation.
Forex dealers said the rally in stock markets after yesterday's petrol price hike generated hopes that further economic reforms will get a boost and foreign funds will start returning to India.
"Rupee recovered today due to some selling of dollars by public sector banks with addition of liquidity from the EEFC accounts. Also, hike in petrol price has lifted the sentiment, pushing up the equity market, which in turn has positive impact on the domestic currency," said N S Venkatesh, Head of Treasury, IDBI Bank.
Meanwhile, RBI Governor D Subbarao at Mussoorie today said the central bank will do whatever is necessary to stabilise rupee. "Some structural changes are necessary for improvement in current account. Meanwhile, the RBI is monitoring the situation and we will do whatever is necessary, consistent with our policy," he added.
Forex experts said sentiments also favoured the rupee after the Euro regained after touching multi-month lows after European Union (EU) leaders reportedly decided to honour commitments to their bailout agreement with Greece.
The benchmark Sensex today bounced back by 274.20 points to close at 16,222.30. (MORE)