Snapping its two-session losing trend, the rupee today ended marginally higher by 2 paise at 65.02 a dollar on fresh selling of the American currency by banks and exporters coupled with firm local equities.
The domestic currency largely shrugged off the initial volatility and rebounded sharply towards the fag-end trade despite the US dollar gaining strength against key rivals overseas.
Abundant capital flows into the debt markets largely supported the recovery momentum, though FIIs remained sellers in equities.
According to the latest depository data, foreign investors poured a whopping USD 2 billion into the Indian debt markets so far this month, while they pulled out Rs 3,408 crore (USD 523 million) from equities during this period.
Meanwhile, US tax policy headlines continued to strengthen against other major trading rivals, with the yen among the biggest fallers.
The dollar has found support as hopes for US tax reforms were boosted last week after the Senate approved a budget measure that will allow Republicans to pursue tax cuts without Democratic support.
In the meantime, domestic equities made a smart rebound after a brief sell-off witnessed on the Muhurat session following heavy buying in key frontline counters and also supported by short-covering ahead of expiry amid strong Asian cues boosted by Japanese Prime Minister Shinzo Abe's re- election victory.
The flagship Sensex jumped over 116 points to end at 32,506.72, while Nifty surged 38 points at 10,184.85.
At the Interbank Foreign Exchange (FOREX) market, the rupee opened lower at 65.08 against last Wednesday's closing level of 65.04 on sustained demand for the American currency from importers.
It later touched a fresh intra-day low of 65.11 in mid morning deals and hovered in a tight range as lack of definite cues restricted the momentum.
However, moving in tandem with domestic equity markets alongside adequate dollar supply, the rupee staged a strong comeback to hit a high of 64.9825 before ending at 65.02, showing a small gain of 2 paise, or 0.03 per cent.
The rupee had lost 30 paise in last two sessions.
The RBI, meanwhile, fixed the reference rate for the dollar at 65.0239 and for the euro at 76.5136.
The dollar index, which measures the greenback's value against a basket of six major currencies, was trading firmly higher at 93.85 in early trade.
In cross-currency trades, the rupee gained further ground against the pound sterling to settle at 85.60 from 85.69 per pound and firmed up against the euro to end at 76.33 from 76.43 earlier.
The local unit also hardened against the Japanese yen to finish at 57.12 per 100 yens compared to 57.70 earlier.
Elsewhere, the euro traded weak ahead of the upcoming ECB monetary policy announcement that is expected to offer clarity on the fate of the central bank's QE asset purchases, with many expecting some reduction in the current 60 billion euro month programme.
In forward market today, the premium for dollar edged up owing to mild paying pressure from corporates.
The benchmark six-month premium payable in March inched up to 117.50-119.50 paise from 117.25-119.25 paise and the far forward September 2018 contract firmed up to 257-259 paise from 255.50-257.50 paise previously.
On the international energy front, global crude prices are trading marginally higher as tensions in the Middle East continue to percolate, with Brent crude, the international benchmark, gaining 0.3 per cent to USD 57.90 a barrel in early Asian trade.
The US marker West Texas Intermediate was up 0.5 per cent at USD 52.11.
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