The rupee fell back sharply against the pound sterling at 83.28 from Monday's close of 82.49 and also reacted downwards against the euro to 71.59 from 71.29.
Dollar selling by exporters and banks also supported the rupee, forex dealers said.
Chief Economic Advisor (CEA) V Anantha Nageswaran on Tuesday said India is not defending the rupee and the Reserve Bank of India is taking necessary steps to ensure that the movement of the rupee is gradual and in line with market trends. Nageswaran further said that the rupee is being managed in a manner that reflects the fundamentals of the economy. "India is not defending the rupee... I don't think Indian fundamentals are such that we need to defend the rupee. "The rupee can take care of itself," he said at an event in New Delhi.
The rupee resumed lower at 54.37 per dollar as against the last closing level of 54.07 at the Interbank Foreign Exchange Market.
On Tuesday, the rupee lost 9 paise to close at 66.67 against the US dollar.
Besides, a higher opening in the domestic equity market supported the rupee but yen's weakness against the dollar overseas capped the rupee's gains, dealers said.
The rupee resumed higher at 53.26 per dollar.
Weak dollar in the overseas market also boosted the rupee value against the dollar, a forex dealer said.
Foreign institutional investors pumped in nearly $167.35 million (Rs 899.83 crore) into the local stock markets on Tuesday, according to the BSE provisional data.
Axis Bank was the top gainer in the Sensex pack, surging around 5 per cent, followed by HDFC twins, ICICI Bank, Bajaj Finance and SBI. NSE Nifty zoomed 274.20 points to end at 14,982.
The rupee had strengthened by 20 paise to close at 55.11 against dollar in Tuesday's trade on fresh selling of US currency by exporters.
Continuing its fall for the sixth consecutive day, the Indian rupee on Monday depreciated by 43 paise against the greenback in opening trade
A higher opening in the domestic equity market and the strengthening of euro and yen against the dollar overseas also aided the rupee, dealers said.
In New York market, the US dollar pared losses on Wednesday amid reports that cut into optimism that Washington lawmakers are close to a deal to avoid going over the fiscal cliff.
There was mild selling of dollars by banks and exporters
The local currency, which had plunged to an all-time low of 55.39 on Tuesday, crashed to 55.82 at the Interbank Foreign Exchange market in early trade.
The rupee had tumbled by 30 paise to close at two-and-a-half-month low of 55.51 against the dollar in the previous session on Friday on sustained demand for the dollar from importers and banks.
Sustained dollar sales by exporters and banks and a higher opening in the equity market also boosted the rupee sentiment, forex dealers said.
The dollar index was down by 0.23 per cent against a basket of six major rivals after the US Federal Reserve continued to express concern about the economy and made no changes to its ultra-easy monetary policies.
The rupee on Monday appreciated by 9 paise to 53.75 against the US dollar in early trade at the Interbank Foreign Exchange on selling of the American currency by exporters and banks.
The rupee had plunged to close at its fresh two-year low of 66.84 against the dollar by falling 11 paise in Tuesday's trade.
The rupee had gained 11 paise to close at a fresh over 18-week high of 53.36 against the dollar in the previous session.
The rupee lost 2 paise to end at 53.47 against the dollar in Monday's session on heavy month-end dollar demand from importers and weakness in equities.
In New York market, the dollar had slipped against the euro on Friday.
The rupee gains became pronounced just before mid-day in Europe as the euro rose against the dollar after German judges removed a major obstacle to the region's new bailout fund, European Stability Mechanism.
Besides, steady euro against the American unit and a higher opening in the domestic equity market supported the rupee, forex dealers said.
The rupee had ended marginally down by 1 paise at 55.63 against the dollar on alternate bouts of buying and selling amid a fag-end recovery in equities in yesterday's session.
The rupee declined by 18 paise to 55.44 against the dollar in early trade on Friday, snapping four sessions of gains, at the Interbank Foreign Exchange on fresh demand for the American currency.
Some weakness in the local stock market amid a rising trend pared rupee's early gains, forex dealers said.
Continued dollar selling by exporters and some banks on hopes of further fall in dollar value overseas also aided the rupee rise.
The rupee rose by 7 paise to Rs 55.68 against the US dollar in early trade today on the Interbank Foreign Exchange as the American currency weakened against euro overseas.
The rupee fell by 34 paise to 55.99 against the US dollar in early trade at the Interbank Foreign Exchange market today as the American currency gained against other currencies overseas.
It had strengthened by 45 paise on Tuesday to close at one-month high of 55.07 against the dollar, tracking a jump in local shares.
In addition, dollar's weakness against other currencies overseas also supported the rupee.
In New York, dollar erased most of its losses on last Friday after the euro briefly jumped following more comments from European Central Bank President Mario Draghi about policy options.
The rupee had ended 79 paise higher to close at 55.15 against the US currency in the previous session on Friday.
In New York, the dollar index climbed to its highest level in about two years on Wednesday.
The Reserve Bank's rate-setting panel will start its 3-day deliberations on Wednesday amid expectations of yet another rate hike of 50 basis points to check high inflation, in line with similar actions taken by other major central banks, including the US Fed. Based on the recommendations of the Monetary Policy Committee (MPC), the RBI had effected 50 basis points increase in repo rate each in June and August after raising the short-term lending rate by 40 basis points in an off-cycle decision in May. The MPC, headed by RBI Governor Shaktikanta Das, is scheduled to meet during September 28-30.
FIIs today pumped in Rs 591 crore in stocks, provisional data from stock exchanges showed.
The rupee recovered by 13 paise to close at 66.31 per dollar on fresh selling of dollars by banks and exporters despite fall in equity market.
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