Boosted by the RBI's fresh steps to curb exchange rate volatility, the rupee on Wednesday bounced back sharply by 63 paise to close at a one-month high of 59.13 against the dollar.
Snapping a two-day fall, the rupee opened strong at 59.49 a dollar from the previous close of 59.76 at the Interbank Foreign Exchange Market and then touched a low of 59.59.
Later, it rebounded to a high of 59.01 before closing at 59.13, a rise of 63 paise or 1.05 per cent.
The Reserve Bank of India on Wednesday announced more measures to squeeze liquidity from the banking system.
It limited access to borrowed funds by reducing the liquidity adjustment facility for each bank from to 0.5 per cent of net demand and time liabilities from 1 per cent.
The RBI also asked banks to maintain a higher average cash reserve ratio of 99 per cent of the requirement daily as against 70 per cent earlier.
"The gains in the currency are mainly attributed to the recent measures announced by the central bank," said Abhishek Goenka, founder & CEO at India Forex Advisors.
"The central bank is taking every possible step to tighten the liquidity in the market and providing support to the weak rupee."
The rupee also got support as the euro was seen sustaining above USD 1.32 levels, taking cues from robust PMI numbers released by Germany and the overall euro zone, Goenka said.
Rupee, one of the worst-performing currencies in emerging markets, fell from 53.80 levels in April to a historic low of 61.21 on July 8 on capital outflows and a widening current account deficit.
A weaker rupee makes imports costlier.
Banking stocks, hit hard by the RBI's steps, led the benchmark S&P BSE Sensex lower for the first time in six days and the index declined 1.04 per cent at the close.
"The RBI also announced the sale of 60 billion rupees of short end cash management bills to pull out more cash from the banking system. Taking cues from this, today's spot rupee appreciated by over 1 per cent and traded near 59 levels," said Pramit Brahmbhatt, CEO at Alpari Financial Services (India).
"The trading range for the spot USD/INR pair is expected to be within 58.80 to 59.40."