Snapping a two-session losing string, the rupee on Tuesday bounced back by 22 paise to end at 54.26 on the back of fresh dollar selling by exporters and capital inflows worth about $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 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 foreign institutional investors pumped in Rs 1,309.88 crore (approximately $250 million) on Tuesday.
The rupee sentiment also improved on better-than-expected trade deficit data. "The trade deficit for November narrowed marginally to $19.3 billion compared to $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 $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 European Union summit, FOMC meet, Index of Industrial Production and inflation data of India, according to Abhishek Goenka, Founder & CEO, India Forex Advisors.