The rupee plunged to all-time intra-day low of 61.80 against the dollar on Tuesday but erased all the losses to end with a gain of 11 paise at 60.77 after the central bank is believed to have intervened heavily in the forex market.
The rupee resumed lower at 61.05 at the Interbank Foreign Exchange Market and continued its slide to 61.80 amid dollar demand from importers.
Fag-end dollar selling by exporters helped the rupee to recover lost ground and settle at the day's high of 60.77, a gain of 11 paise.
The rupee earlier touched an intra-day low of 61.21 on July 8.
"Overnight movements in the US affected the rupee in a big way as fears resurfaced that the Fed may soon start tapering its bond-buying programme. The over-reliance on US events is hitting domestic markets," said Dhanlaxmi Bank Executive Vice-President (Treasury) Srinivasa Raghavan.
On Monday, data showed an acceleration in the pace of growth in US services sector in July, indicating that a rebound in world's largest economy is continuing and may lead the Fed to taper its $85-billion-a-month bond buys soon.
Late dollar selling by exporters on hopes of intervention by the Reserve Bank of India (RBI) amid a weakening dollar overseas helped the rupee to rally, a forex dealer said.
"Towards the end, RBI intervened in the market via state-run banks to support the currency," said Pramit Brahmbhatt, CEO of Alpari Financial Services (India).
"Negative sentiment will push down the rupee further to trade near 62 levels in coming days."
The sliding rupee took a toll on the stock markets, with the benchmark BSE S&P Sensex plunging over 449 points or 2.34%. FIIs injected Rs. 33.35 crore on Monday and picked up shares worth Rs. 212.74 crore on Tuesday, according to the BSE.
Government on Tuesday told Parliament it has taken a slew of steps to check forex volatility and is watching the situation.
"(The government) has taken a slew of initiatives to boost exports and reduce imports, encourage capital flows to facilitate financing of CAD and stem the volatility in the exchange rate of the rupee," Finance Minister P Chidambaram told the Rajya Sabha in a written reply.
Forward dollar premiums recovered on fresh payments from banks and corporates.
The benchmark six-month forward dollar premium payable in January rose to 262-266 paise from Monday's close of 255-258 paise. Far-forward contracts maturing in July shot up to 486-491 paise from 468-471 paise.
The RBI fixed the reference rate for the dollar at 61.5355 and for the euro at 81.5785.
The rupee recovered to 93.33 against the pound sterling from the close of 93.44 and moved up to 80.64 per euro from 80.76. It remained weak against the Japanese yen, at 61.94 per 100 yen from the previous close of 61.84.