The rupee had plunged to hit a 27-month low of 67.09 on Monday.
Breaking a two-day slide, the rupee staged a resounding comeback from its over two-year lows to close at 66.92 against the US dollar amid rise in equities.
A cautious tone largely dominated trading sentiment ahead of most awaited event of the year - Federal Reserve's widely anticipated monetary policy announcement and also collapsing energy prices.
The home currency had plunged to hit a 27-month low of 67.09 on Monday.
In active trade at the Interbank Foreign Exchange (Forex) market, the domestic unit resumed better at 67.03 from overnight close of 67.09 on mild dollar selling.
It largely fluctuated between a high of 66.92 and a low of 67.12 throughout the day, due to uneven dollar demand and supply.
However, mirroring a smart rally in local equities and heavy dollar selling by state-run banks towards the fag-end trade helped the rupee to recover and end firmly higher at 66.92, showing a healthy gain of 17 paise, or 0.25 per cent.
The US central bank is expected to raise interest rates for the first time in nearly a decade at the conclusion of its two day policy meeting on Wednesday.
In this scenario, flight to seek dollar safety is expected to intensify pressures on the rupee in the short term even higher cost of borrowing will impact Indica inc margins that have borrowed in US dollars, a forex dealer said.
On the global front, the dollar slipped to seven-week low against a basket of major currencies amid jitters in the high-yield corporate debt market.
Meanwhile, China's yuan hit a fresh 4-1/2-year low after the central bank set its lowest daily guidance rate for a second day in a row.
The dollar index, which tracks the world's reserve currency against a basket of its peers, is down 0.16 per cent at 97.58.
The stock market flagship index Sensex surged for the second-day, rallying by over 170 points to end at 25,320.44, while broader Nifty reclaimed 7,700 mark.
Illustration: Uttam Ghosh/Rediff.com
