The rupee on Wednesday rose to one-and-a-half-month high of 53.77 but erased gains to close 7 paise down at 54.21 against the dollar on weakness in domestic equities amid strong dollar overseas.
The dollar demand from importers also weighed on the rupee, while fresh capital inflows restricted the fall to some extent, a forex dealer said.
The rupee resumed remarkably higher at 53.93 a dollar from previous close of 54.14 at the Interbank Foreign Exchange (Forex) market and touched a high of 53.77, level not seen since February 28, 2013, when it had logged a high of 53.60.
Later, it met with strong resistance on weakness in local equities and dropped to a low of 54.22 before settling at 54.21, showing a fall of 7 paise or 0.13 per cent. On Tuesday, it had spurted by 48 paise or 0.89 per cent.
The Indian benchmark S&P BSE Sensex on Wednesday closed down by 13.77 points or 0.07 per cent on steep fall in heavyweight RIL while FIIs pumped in Rs 591.76 crore (Rs 5.91 billion) on Tuesday, as per provisional data with stock exchanges.
The dollar index was up by a whopping 0.48 per cent against a basket of six major global currencies.
Pramit Brahmbhatt, CEO, Alpari Financial Services (India) said: "Rupee traded volatile on Wednesday, in the first session it traded strong against the dollar and had a gap up opening taking cues from the local equities which opened positively but during the day it lost its way and managed to close near Tuesday’s close.
"But as the day progressed rupee depreciated taking cues from the strong dollar. Support for USDINR (Spot) pair is at 53.80 below which we can see further downfall; the trading range for the same is expected to be within 53.80-54.40.
"After witnessing a strong session on Tuesday, the rupee erased the gains on Wednesday and closed on a weaker note. Negative stock markets, weakness in the euro and the recovery in the dollar index have contributed for the weakness in the rupee.
"Technically, we feel 53.75 is a strong support for the dollar-rupee pair and the major trend of rupee remains bearish," said Abhishek Goenka, Founder and CEO, India Forex Advisors.
Meanwhile, the premium for the forward dollar remained weak on consistent receipts by exporters.
The benchmark six-month forward dollar premium payable in September moved down to 168-170 paise from last close of 171-172-1/2 paise and far-forward contracts maturing in March also softened to 339-341 paise from 340-341 paise.
The RBI fixed the reference rate for the US dollar at 53.9423 and for the euro at 71.0455.
The rupee continued its upward march and closed up at 82.65 against the pound sterling from last close of 82.89 while it fell back against the euro to 71.16 from 71.00.
Rupee reacted downwards against the Japanese yen to 55.46 per 100 yen from overnight close of 55.35.