Snapping a two-session losing string, the rupee today bounced back by 22 paise to end at 54.26 on the back of fresh dollar selling by exporters and capital inflows worth about USD 250 million.
A weak dollar overseas ahead of a US Fed policy meeting also aided the rupee recovery while late weakness in domestic equities restricted the rupee's rise, forex dealers said.
At the Interbank Foreign Exchange (Forex) market, the local unit resumed higher at 54.40 a dollar from overnight close of 54.48, but declined immediately to a low of 54.46.
However, emergence of dollar selling by exporters on hopes of fall in dollar overseas helped the rupee to bounce back to a high of 54.25 before concluding at 54.26 -- a rise of 22 paise or 0.43 per cent.
Provisional stock exchange data showed FIIs pumped in Rs 1,309.88 crore (approx. USD 250 million) today.
The rupee sentiment also improved on better-than-expected trade deficit data. "The trade deficit for November narrowed marginally to USD 19.3 billion compared to USD 20.9 billion in previous month," said Chetan Ahya, MD and Asia Pacific economist at Morgan Stanley in a report.
The dollar index was down by 0.18 per cent against a basket of six major global currencies while New York crude oil was trading below USD 86 a barrel in Europe today.
Pramit Brahmbhatt, CEO, Alpari Financial Services (India) said: "Rupee recovered from initial losses after the markets rebounded from lows to end the day on a flat note."
Going forward, investors will be closely tracking the important events lined up this week including EU summit, FOMC meet, IIP and inflation data of India, according to Abhishek Goenka, Founder & CEO, India Forex Advisors.
Meanwhile, the Indian stock market benchmark Sensex, which was up by over 200 points in early stages, closed down by 22.55 points on profit-booking.
Forex dealers said today's capital inflows could be attributed to the Rs 4,500-crore IPO from Bharti Infratel that began today. It is likely to be followed by over USD 1 billion stake sale in NMDC and may lead to a surge in flows soon, they added.
"The upcoming slew of domestic economic numbers and expectations of further easing after the operation twist by FOMC continued to keep the traders sidelined in both local and global markets," said Brahmbhatt.
The premium for the forward dollar improved further on sustained payments from banks and corporates.
The benchmark six-month forward dollar premium payable in May edged up to 170-172 paise from Monday's close of 169-170-1/2 paise.
Far-forward contracts maturing in November also firmed up to 318-1/2-320-1/2 paise from 316-1/2-318 paise. The RBI has fixed the reference rate for the US dollar at 54.3160 and for euro at 70.3615.
The rupee recovered against the pound sterling to 87.25 from last close of 87.41 and also bounced back against the Japanese yen to 65.81 per 100 yen from 66.29.
It, however, fell back slightly against the euro to 70.40 from previous close of 70.34.