The rupee depreciated by 14 paise to close at 61.93 against the dollar on Wednesday, partially erasing early losses after government data showed India's trade deficit narrowed to a 30-month low.
The rupee came under pressure on demand from importers as the dollar strengthened overseas.
The rupee opened lower at 62.07 a dollar from the previous close of 61.79 and moved in a range of 61.72 and 62.30. It ended 61.93, a fall of 14 paise or 0.23 %.
The government said exports grew 11.15 % in September and imports declined 18.1 % amid a sharp fall in inward shipments of gold and silver, taking the trade deficit to the lowest level in 30 months. The trade data also helped local stocks to recover from initial losses.
"Negative stock markets and weak Asian currencies made the rupee open on a weaker note against the US dollar. But then the better-than-expected trade deficit data helped the rupee," said Abhishek Goenka, CEO of India Forex Advisors.
The 30-share Sensex gained 265.65 points or 1.33 %. Foreign institutional investors bought a net Rs 226.32 crore of shares yesterday, as per provisional data with the stock exchanges.
The dollar index was up by 0.5 % against a basket of six major global currencies.
The rupee has recovered from an all-time low of 68.85 against the dollar in late August after liquidity-tightening steps by the government to curb exchange rate volatility and restrictions on gold imports to reduce dollar outflows.
"India's trade deficit narrowed to a two-and-a-half-year low in September, raising hopes for a significant reduction in the country's gaping current account deficit, which helped the rupee to recover some of its early losses," said Pramit Brahmbhatt, CEO of Alpari Financial Services (India). "The trading range for the spot USD-INR pair is expected to be within 61.00 to 62.50."
Forward dollar premiums declined further on sustained receipts by exporters.
The benchmark six-month forward dollar premium payable in March eased to 233-1/2-235-1/2 paise from yesterday's close of 237-242 paise and far-forward contracts maturing in September dipped to 438-1/2-441-1/2 paise from 443-1/2-448-1/2 paise.
The RBI fixed the reference rate for the dollar at 61.9170 and for the euro at 83.9247.
The rupee recovered to 98.80 against the pound from the overnight close of 99.43 and to 83.70 per euro from 83.90.
It fell slightly against the Japanese yen to 63.67 per 100 yen from 63.65.