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Rising for the first time in four sessions, the rupee today appreciated moderately by four paise to end at 54.14 against the dollar on fresh selling of the US currency by exporters and sustained capital inflows.
Forex dealers said a weak dollar overseas and firm domestic equities also helped the rupee to recover.
Foreign institutional investors put in over USD 121 million (Rs 655.21 crore) into domestic stocks today, according o provisional BSE data.
The rupee started weak at 54.23 a dollar against yesterday's close of 54.18 at the Interbank Foreign Exchange (Forex) market.
It declined further to 54.36 on initial dollar demand from importers and some banks but later bounced back in line with smart rise in local stocks to a high of 54.06 before settling at 54.14, showing a rise of four paise, or 0.07%.
The dollar index reacted downwards and was quoting weak by 0.30% against a basket of six major currencies.
"The rupee erased its earlier losses and started posting gains against the US dollar. There are two reasons for the same. Firstly, the strong gains made by the domestic benchmark indices and secondly a robust German data which supported the Euro to inch above 1.31 levels," said Abhishek Goenka, Founder and CEO, India Forex Advisors.
The BSE benchmark Sensex today spurted by 215.31 points to end at over three-month high of 19,888.95.
Pramit Brahmbhatt, CEO, Alpari Financial Services (India) said: "Today rupee traded low taking cues from the dollar which traded weak against the major currencies mainly against the Euro, also the Indian equity markets traded strong throughout the day and closed up by over one% which strengthened the rupee."
The premium for the forward dollar fell back on fresh receivings by exporters.
The benchmark six-month forward dollar premium payable in October softened to 176-1/2-178 paise from Monday's close of 178-179-1/2 paise and far-forward contracts maturing in April also declined to 344-346 paise from 347-349-1/2 paise.
The RBI fixed the reference rate for the US dollar at 54.2770 and for the euro at 70.9996.
The rupee recovered against pound sterling to 84.11 from previous close of 84.29 while eased further against the euro to 71.03 from 71.01.
However, it closed stable against the Japanese yen to its overnight level of 54.58 per 100 yen.
