The rupee ended at 81.0950 per dollar, against its previous close of 81.26. It opened at 81.13 and immediately weakened up to 81.44 before recouping its losses.
Traders said there was strong demand for dollars by private and foreign banks in the morning, likely on behalf of their corporate clients.
The subsequent losses were reversed in the later half of the session as the dollar index dropped 0.7%, a trader with a private bank said.
Asian markets got a boost from the offshore yuan shrugging off weak Chinese data to rise for the fourth day in a row. It has gained nearly 3% in that time and is headed towards strengthening past the 7 per dollar mark. [CNY/]
Most regional currencies and stocks were trading higher, while U.S. stock futures pointed to a strong open. Indian stocks continued their strong run.
Sentiment improved as a meeting between the heads of China and the United States on the sidelines of the G20 Summit signalled an easing of tensions.
Some market participants are hoping foreign investor inflows remain robust, which will help the rupee end the year firmer than their earlier expectations.
Bank of America now forecasts the rupee to be about 81 per dollar by December versus its previous estimate of 84. With Fed rates peaking next year and China finding stability, Asia could have "more policy room and easier financial conditions," they said.
However, India's merchandise trade deficit widening in October due to falling exports remained a cause for worry.
(Reporting by Anushka Trivedi in Mumbai; Editing by Savio D'Souza)
By Anushka Trivedi
