Staging a smart recovery, the rupee on Wednesday settled 4 paise higher at 65.27 against the US dollar despite plunging to a fresh two-year low in early trade amid global currency volatility.
Besides, fresh dollar selling by exporters and suspected RBI intervention through state-owned banks predominantly triggered the rupee recovery as emerging market currencies continued to founder amid worries over the Chinese economy, forex dealers said.
The rupee is likely to remain an out-performer among emerging market currencies and less vulnerable to China's yuan devaluation against the backdrop of robust forex reserves, they added.
The local currency also benefited from a smart rebound in local equities as well as subdued greenback overseas.
The dollar traded marginally lower against the major currencies as investors turned bit cautious and awaited US inflation data and the minutes of the Fed's July meet later in the day to track timing of a rate hike.
The rupee opened substantially lower at 65.40 from Monday's closing level of 65.31 at the Interbank Foreign Exchange (Forex) market due to sustained demand from importers and foreign institutional investors.
It weakened further to hit a fresh two-year low of 65.44 in late morning trade.
However, smart recovery in local equities and fresh selling of dollars by exporters helped the local unit to rebound to touch a high of 65.11 before ending at 65.27, revealing a gain of 4 paise, or 0.06 per cent.
The US dollar index, which tracks the greenback against a basket of six major rivals, was down by 0.03 per cent at 96.96.
Meanwhile, the benchmark BSE Sensex rebounded sharply by 100.10 points, or 0.36 per cent, to settle at 27,931.64.
Foreign portfolio investors (FPIs) turned sellers after three days of continued buying and sold shares worth a net Rs 255.42 crore on Tuesday, as per provisional data released by the stock exchanges.
Veracity Group CEO Pramit Brahmbhatt said, "The rupee traded robust with the help of strong local equity market; also the dollar index is trading weak against other major currencies which further helped the local currency."
The trading range for the Spot USD/INR pair is expected to be within 64.90 to 65.70.
In the forward market, premium for dollar recovered on fresh payments from banks and corporates.
The benchmark six-month premium payable in January inched up to 194.75-196.75 paise from 194-196 paise previously.
Far forward contracts maturing in July 2016 also rose to 417.5-419.5 paise as compared to 415-417 paise.
The RBI fixed the reference rate for the dollar at 65.2525 and for the euro at 72.1954.
The rupee dropped further against the pound sterling to finish at 102.25 as against 102.09 and also declined against the Japanese currency to 52.48 per 100 yen from 52.45 on Monday.
It, however, strengthened against the euro to settle at 72.05 from 72.45 in the previous session.