The rupee had recovered from its 29-month lows by rising 39 paise to close at 67.63 on Friday.
The rupee fell back sharply after a brief rebound from its 29-month low to end at 67.83 against the US dollar following a renewed demand for the greenback.
Fresh unwinding of the long rupee bets by speculative traders ahead of the two-day Federal Reserve meet and robust month-end dollar demand from importers predominantly reflected on trading sentiment, despite sluggish dollar overseas.
The domestic unit commenced firmly higher at 67.54 against the weekend close of 67.63 at the Interbank Foreign Exchange (forex) market and gained further to 67.53 on the back of sustained dollar selling by exporters and banks.
However, reversing an initially upmove, the rupee suddenly turned volatile and saw a sharp downturn in late afternoon trade to hit a fresh intra-day low of 67.85 due to robust dollar demand from importers, mainly oil refiners before finishing at 67.83, revealing a loss of 20 paise, or 0.30 per cent.
The rupee had recovered from its 29-month lows by rising 39 paise to close at 67.63 on Friday.
In worldwide trade, the dollar slipped lower against the other major currencies, but remained broadly supported ahead of Federal Reserve's upcoming policy meet.
The US Federal Open Market Committee's meeting on January 26-27, whereby its statement due on Wednesday might reveal about policy intentions and the US economic outlook.
The domestic currency market will remain shut on Tuesday, January 26 on account of "Republic Day".
In the meantime, crude oil prices retreated sharply, tumbling nearly 4 per cent, as persistent worries about oversupply continue to plague the oil markets.
The dollar index, which tracks the world's reserve currency against a basket of its peers, is down 0.06 per cent at 99.55.
Meanwhile, the flagship stock market index Sensex finished higher by 50.29 at 24,485.95, while 50-share Nifty gained by over 14 points to 7,436.15.
In forward market, premium for dollar remained weak owing to sustained receiving from exporters.
The benchmark six-month premium payable in June declined to 179-191 paise compared to 181-183 paise last weekend and forward December 2016 contract also dropped to 387-389 paise against 390-392 paise.
The RBI fixed the reference rate for the dollar at 67.6428 and for the euro at 73.1219.
In cross-currency trades, the rupee recovered modestly against the pound sterling to end at 96.54 from 96.56 last Friday.
However, the home unit declined against the euro to settle at 73.39 compared to 73.22 earlier and also moved down against the Japanese yen to close at 57.26 from 57.17 per 100 yens.
