A strong dollar weighed on rupee but the local currency managed to erase early losses and settle 3 paise higher at 54.78, amid signs of massive capital inflows.
The rupee commenced weak at 54.86 a dollar and moved down further a low of 54.91 at the Interbank Foreign Exchange market on initial dollar demand from importers.
It, however, bounced back on rally in local stocks to a high of 54.65 a dollar before again falling back to end at 54.78 -- a rise of three paise or 0.05 per cent over its previous closing of 54.81, a one-month low.
The dollar index was up by 0.43 per cent against a basket of six major currencies as euro dropped against the dollar, after quarterly economic reports from France and Germany
The Indian benchmark S&P BSE Sensex today zoomed by 491 points, or 2.49 per cent, to a fresh 28-month high on hopes of rate cut by the RBI in its next monetary policy meeting.
FIIs pumped in a staggering Rs 1,646.95 crore ($300 million) in stocks today as per provisional BSE data.
Stocks rallied after Reserve Bank of India Governor D Subbarao said the central bank would take into account falling inflation while deciding on policy initiative in its review next month.
Pramit Brahmbhatt, CEO, Alpari Financial Services (India) said: "Rupee was supported by good dollar inflows into Indian equities market.
"However, a strong dollar in the overseas market and a weak Euro after weak GDP numbers kept rupee in check.
"We expect rupee to trade in the range of 54.64 to 55.18 tomorrow."