In see-saw trade, the rupee on Thursday strengthened to 58.76, only to erase those gains and settle two paise higher at 59.11 against the dollar.
This is second day of gains after the RBI's fresh steps to curb liquidity.
At the Interbank Foreign Exchange Market, the rupee resumed lower at 59.30 from the previous close of 59.13 and declined to a low of 59.39 amid weakness in local equities.
It later bounced back to breach the 59-mark and touched a high of 58.76 on heavy dollar selling by exporters as the US currency strengthened overseas.
It finally settled at 59.11, a gain of two paise.
On Wednesday, it had spurted by 63 paise, or 1.05 per cent, after the RBI reduced the liquidity adjustment facility for banks and asked them to maintain a higher average daily cash reserve ratio in a bid to curb exchange rate volatility.
"The central bank's efforts are yielding fruit," said Abhishek Goenka, CEO of India Forex Advisors. "Today's US unemployment claims and durable goods orders data will be watched for further direction of the trend in the dollar."
The benchmark S&P BSE Sensex today tumbled 1.42 per cent. FIIs pulled out Rs 404.50 crore (Rs 4.04 billion) on Wednesday and Rs 442.94 crore (Rs 4.42 billion) on Thursday, according to provisional data with the stock exchanges.
Banks and exporters preferred to reduce their dollar position in view of weakness in the US currency.
In the global market, the dollar was quoting 0.10 per cent lower against major rivals, edging back from gains launched by stronger-than-expected US economic data and a climb in Treasury yields.
The trading range for the spot USD/INR pair is expected to be within 58.70 to 59.40," said Pramit Brahmbhatt, CEO of Alpari Financial Services (India).
Forward dollar premiums dropped sharply on fresh receipts by importers.
The benchmark six-month forward dollar premium payable in December dipped to 228-233 paise from Wednesday's close of 248-254 paise. Far-forward contracts maturing in June fell to 451-456 paise from 492-497 paise.
The RBI fixed the reference rate for the dollar at 58.9415 and for the euro at 77.8663.
The rupee improved to 90.33 against the pound sterling from the previous close of 90.78 and moved up to 77.99 per euro from 78.29.
It fell against the Japanese yen to 59.25 per 100 yen from 59.11.