After logging a three-month high of 53.38, the rupee on Tuesday erased initial gains to close four paise down at 53.81 against US dollar following late weakness in local stocks and sustained demand of the American currency.
A sluggish dollar movement in overseas markets and continued capital inflows restricted the rupee fall to a major extent, forex dealers said.
At the Interbank Foreign Exchange market, the domestic unit resumed higher at 53.61 a dollar from overnight close of 53.77.
Helped by positive factors including uptick in stocks, the rupee touched a three-month high of 53.38, a level not seen since October 23, 2012 when it had logged an intra-day high of 53.34.
It, however, succumbed to heavy profit-booking in equities after mid-session coupled with dollar selling by exporters to touch a low of 53.88.
The rupee finally concluded a tad lower at 53.81, a fall of four paise or 0.07 per cent.
On Monday, it had eased by six paise or 0.11 per cent.
The dollar index was down by 0.34 per cent against a basket of six major global rivals as reports said the Bank of Japan voted for a 2 per cent inflation target and shifted to open-ended asset purchases in a bid to end stagnation.
Pramit Brahmbhatt, CEO, Alpari Financial Services (India) said, "The rupee erased the gains of first half after the domestic equity markets edged lower after testing the January 2011 level on profit taking."
Explaining the factors behind rupee's initial jump, Abhishek Goenka, Founder and CEO, India Forex Advisors said: "Rupee was seen appreciating initially on account of RBI's dollar-rupee swap facility which started from on Monday.
It was also gaining taking cues from gains in Euro, after the Euro group leaders approved the latest tranche in bailout funding for Greece."
However, negative stock markets restricted the gains in rupee and made it weak, he added.
Meanwhile, the premium for the forward dollar also eased further on stray receipts by exporters.
The benchmark six-month forward dollar premium payable in June softened to 160-162 paise from yesterday's close of 161-163 paise.
Far-forward contracts maturing in December also edged down to 315-317 paise from 316-318 paise.
The RBI has fixed the reference rate for the US dollar at 53.5115 and for euro at 71.4275.
The rupee fell back slightly against the pound sterling to end at 85.37 from overnight close of 85.34 and also declined against the euro to 71.86 from 71.51.
It also remained weak against the Japanese yen to settle at 60.65 per 100 yen from last close of 60.07.