Forex dealers said a firm rise in local equities and sluggish dollar overseas also boosted the sentiment in rupee's favour.
The local unit opened lower at 55.07 against the dollar at the Interbank Foreign Exchange (Forex) market from Monday's close of 54.95 and fell further to a low of 55.10 on month-end dollar demand from importers, mainly oil refiners.
However, firm local stocks amid late dollar selling by exporters helped the rupee to bounce back to a high of 54.81 before concluding at 54.84, a net rise of 11 paise, or 0.20 per cent, from its previous closing.
Foreign institutional investors today pumped in over USD 135 million (Rs 744 crore) into domestic equities, as per provisional BSE data.
The BSE benchmark Sensex today closed higher by 162.37 points at 19,417.46.
"The rupee extended its gaining momentum for the second straight session amid thinly traded volumes tracking huge gains in domestic equity markets and rising capital inflows," said Pramit Brahmbhatt, CEO, Alpari Financial Services (India).
The Commerce Ministry also approved a package of incentives to boost exports, which supported the rupee, he said.
Faced with a widening trade deficit, the government today announced a slew of incentives to reverse decline in exports which will still fall much short of the USD 360 billion target for the current fiscal.
The dollar index, a gauge of six major global currencies, was down by 0.1 per cent as traders warily eyed the soon-to- resume US budget talks on a deal to avert the fiscal cliff. (MORE)
