Mumbai: Tracking stock markets, the rupee Tuesday surrendered all of its early gains to decline by four paise at 55.10 amid fresh dollar demand from importers and some banks.
However, a weak dollar overseas amid sustained capital inflows capped the rupee fall to some extent, dealers said.
At the Interbank Foreign Exchange (Forex) market, the domestic unit opened remarkably higher at 54.81 a dollar from overnight close of 55.06.
It immediately touched a high of 54.79 on early rise in local equities and sustained dollar selling by exporters.
A sluggish trend in the US dollar overseas also boosted the rupee sentiment in early stages, said traders.
However, the rupee turned negative and fell sharply to a low of 55.14 before concluding at 55.10, a fall of four paise.
On Monday, it rose by 10 paise or 0.18 percent.
The Indian stock market benchmark Sensex, which was up by nearly 129 points at initial stages, closed down by 9.68 points in volatile trading Tuesday.
FIIs pumped in USD 124.83 million on Monday as per SEBI data.
The dollar index was down by 0.20 percent against a basket of six major rivals despite fall in euro after Moody's downgraded France's AAA credit rating while New York crude oil was trading above USD 89 a barrel in Europe Tuesday.
"The early gains in the rupee were on account of on sustained selling of dollars by banks and exporters on the back of a weak dollar in the overseas market. Later, it started weakening against the dollar and moved below 55.00 levels," said Abhishek Goenka, Founder and CEO, India Forex Advisors.
The Reserve Bank will intervene in the forex market only to curb excessive volatility in exchange rate but stated there is no target set for rupee, deputy governor Subir Gokarn said on Monday.
Pramit Brahmbhatt, CEO, Alpari Financial Services (India) said: "The rupee reversed the initial gains on weak equity markets also weighed by the oil importers demand. The dollar index retreated from its high as intensifying hopes of release of the financial aid to Greece by the Euro group ministers lead to extension of gains in the single currency."
"The upcoming Winter session of Parliament is under focus and fears of no confidence motion against the government has dented sentiments....," he added.
The premium for the forward dollar ended steady to easy on fresh stray receipts by exporters.
The benchmark six-month forward dollar premium payable in April softened to 143-145 paise from Monday's close of 144-1/2-146-1/2 paise.
However, far-forward contracts maturing in October ended stable at its overnight closing level of 283-285 paise.
The RBI has fixed the reference rate for the US dollar at 54.9100 and for euro at 70.2380.
The rupee remained sluggish against the pound sterling to 87.75 from previous close of 87.58 and also declined further to 70.56 per euro from 70.32.
It, however, improved further against the Japanese yen to 67.73 per 100 yen from last close of 67.83.