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The Indian rupee pared its early gains but was still quoted higher by 76 paise to 62.72 per dollar in late morning deals today on selling of the US currency by banks and exporters.
The local currency resumed lower at 63.70 per dollar as against the last weekend's level of 63.48 at the Interbank Foreign Exchange (Forex) market.
However, it recovered afterwards to 62.50 before quoting 62.72 per dollar at 1040 hours.
It moved in a range of 62.50 and 63.70 per dollar during the morning deals.
In the global markets, the US dollar traded lower in early trade after former US Treasury Secretary Larry Summers withdrew himself from the race to be the next Federal Reserve chairman.
Meanwhile, the Indian benchmark BSE-30 share index Sensex trimmed its earlier gains, but was still quoted higher by 211 points or 1.07 per cent to 19,943.75 at 1050 hours.
The Indian rupee rallied to a near one-month high on Monday, with stocks and bonds joining in, as hopes for a prolonged easy monetary policy in the U.S. boosted emerging markets.
However, traders said domestic concerns such as inflation and decade-low economic growth were likely to cap extended gains.
After hitting a series of record lows in August, the rupee has stabilised since Raghuram Rajan, the new Reserve Bank of India (RBI) governor, assumed office on September 4 and announced a series of measures to boost the battered currency.
The rupee has since gained 8.3 per cent, to hit a near one-month high of 62.45 per dollar.
Traders, however, said Monday's rally was only a knee-jerk reaction and markets would again start focusing on the domestic fundamentals soon, which would keep trade choppy heading into the central bank's monetary policy decision on Friday.
Prior to that, the Federal Reserve will announce its much awaited move on tapering monetary stimulus after its two day meet on Sept 17-18.
"We continue to expect that a Fed taper should pressure Asian FX in those countries in weak external positions, however the domestic policy responses will continue to colour the degree of reaction," Sacha Tihanyi, senior currency strategist at Scotiabank, wrote in a note.
The partially convertible rupee was trading at 62.63/64 per dollar by 0944 India time (0413 GMT), after hitting 62.45, its strongest since August 19 and sharply above its close of 63.49/50 on Friday.
It had hit a record low of 68.85 on August 28.
The benchmark 10-year bond yield was trading down 7 basis points at 8.42