Amid alternate bouts of buying and selling, the rupee today recovered from steep early losses to close just two paise down at 54.48.
At the Interbank Foreign Exchange (Forex) market, the local unit commenced weak at 54.52 and immediately touched a low of 54.75 on early hesitancy in domestic equities amid sustained dollar demand from importers.
Initial rise in dollar in the overseas markets also weighed on the rupee, said dealers.
However, emergence of dollar selling by exporters, recovery in local stocks and continued capital inflows later helped the rupee to recover from its early low.
The rupee bounced back to a high of 54.26 before settling at 54.48 -- a drop of two paise. In the last three days, the rupee has fallen by 22 paise against the dollar.
"It was a very volatile session for the rupee, which closed at 54.48 levels. It was seen appreciating on account of sharp recovery in the Euro which moved above USD 1.3100.
"Agreement on Greece bailout helped the Euro to gain against the dollar. The better than expected inflation rate also helped the rupee. However, later we saw a sudden depreciation caused by dollar buying by a PSU bank," said Abhishek Goenka, Founder and CEO, India Forex Advisors.
Meanwhile, the Indian benchmark Sensex today closed higher by 87.99 points, snapping a five-session losing string.
The dollar index was down by nearly 0.05 per cent against a basket of six major currencies.
The rupee also saw some volatility after release of WPI-based inflation data which came in at 7.24 per cent year-on-year for November, versus expectations of 7.6 per cent, forex traders said.
"Initial fall in the rupee was also attributed to dollar buying by the major state-run bank on the behalf of defence-related companies," Goenka added.
Meanwhile, the premium for the forward dollar remained weak on continued receipts by exporters.
The benchmark six-month forward dollar premium payable in May moved down further to 164-165 paise from Thursday's close of 166-1/2-168 paise.
Far-forward contracts maturing in November also dropped to 309-1/2-311-1/2 paise from 314-316 paise.
The RBI has fixed the reference rate for the US dollar at 54.3880 and for euro at 71.2920.
The rupee softened further against the pound sterling to 87.82 from last close of 87.77 and also dropped against the euro to 71.35 from 71.07.
It, however, continued to rule firm against the Japanese yen to end at 65.04 per 100 yen from previous close of 65.30.