The gains were capped due to month-end dollar demand from importers, mainly oil firms
The rupee, on Monday, snapped its two-day downtrend to end higher by 4 paise to 66.85 on the back of fresh selling of the US dollar by exporters.
The rupee staged a smart rebound after overcoming early volatile movements largely impacted by the dollar's strength against most peers.
But the gains were capped due to month-end dollar demand from importers, mainly oil firms.
At the Interbank Foreign Exchange (Forex) market, the local unit opened on a steady note at 66.89 before drifting sideways to hit a low of 66.9225.
However, the domestic currency recovered in late afternoon deals to touch a fresh intra-day high of 66.8250 on late exporter dollar sales.
It finally settled at 66.85, revealing a gain of 4 paise, or 0.06 per cent.
The rupee has been under steady pressure in recent weeks on growing expectations that the Federal Reserve may go for a rate hike at the end of this year and also an adverse spillover effect of $22.4 billion possible outflow in the wake of ongoing FCNR-B redemptions.
In the meantime, country's foreign exchange reserves declined for the second-straight week by $1.506 billion to $366.139 billion in the week to October 14.
In worldwide trade, the American currency continued its rising trend against most major and emerging market currencies.
Pound sterling remained under selling pressure on mounting concerns that rating agency could downgrade the UK, while euro gained some ground after recent sharp plunge following release of stronger PMI readings.
The dollar index, which measures its broader strength against a basket of currencies, was down 0.03 per cent at 98.59 after touching a high of 98.846 - its loftiest peak in nine months in early trade.
The RBI, on Monday, fixed the reference rate for the dollar at 66.8625 and euro at 72.7999.
In cross-currency trades, the rupee fell back against the pound sterling to end at 81.86 as compared to 81.65 and also softened against euro to finish at 72.87 from 72.86. earlier.
On the other hand, it maintained advances against the Japanese yen to finish at 64.30 from 64.47 per 100 yens last weekend.
Meanwhile, domestic bourses made a smart recovery on value buying and good earnings visibility amid some short-covering ahead of F&O expiry.
The flagship BSE Sensex rose 101.90 points to close at 28,179.08, while broader Nifty edged higher 16 points to 8,708.95.
In the forward market, premium for dollar turned lower owing to sustained receiving by exporters.
The benchmark six-month premium for March moved down to 151.75-152.50 paise from 152.5-154.5 paise and the forward-September 2017 contract also declined to 327.75-328.75 paise from 328-330 paise last Friday.
Crude prices are trading marginally weak in early trade after the largest oil exporter said it wanted to be exempt from an OPEC deal to cut production, though losses were capped by Iran saying it would encourage other members to join an output freeze.
Photograph: Reuters