Forex dealers, however said, a rally in local equities amid increased capital inflows limited the rupee's fall to some extent.
The domestic unit commenced weak at 54.44 a dollar from previous close of 54.35 at the Interbank Foreign Exchange (Forex) market and touched a high of 54.36 in afternoon deals.
Later, it fell back to a low of 54.62 on some hesitancy in local equities and dollar buying by importers. It managed to recover some ground and settled at 54.50, a fall of 15 paise, or 0.28 per cent. In the last two days, it had spurted by 64 paise, or 1.16 per cent, to a nearly three-week high.
"The demand from oil importers at rupee's three-week high levels continued to erase gains in the local currency, pushing it down against the dollar, amid weakness in equities which later added minuscule gains towards the end of the session," Alpari Financial Services (India) CEO Pramit Brahmbhatt said.
Foreign institutional investors pumped in USD 256.4 million (Rs 1,397.38 crore) into the local stock markets today, according to provisional BSE data.
"The weakness in rupee was due to a sharp recovery in the dollar index as the focus now shifts to economic data and the looming US debt ceiling battle," said Abhishek Goenka, founder and CEO, India Forex Advisors.
The dollar index was up by 0.31 per cent against a basket of six major global currencies, reversing losses made last night immediately following US lawmakers clinching a last-minute deal to avert the so called "fiscal cliff" for the time being.
Meanwhile, the BSE benchmark Sensex closed up by 50.54 points at 19, 19,764.78. (MORE)
