The rupee gains to trade at 54.69/70 versus its previous close of 54.77/78. The rupee had fallen to as low as 54.96 earlier in the session.
Traders say hopes of foreign direct investment in multi-brand retail getting approved via a vote in parliament on Wednesday keeping sentiment for the local currency positive.
Gains in domestic shares also hurting the pair with custodian banks stepping in to sell the greenback.
Earlier gains were on the back of dollar demand of about $200 million, likely from an IT firm, and it has faded now, also hurting the pair, traders say.
MphasiS Ltd, an Indian IT services and back-office support provider and a unit of Hewlett-Packard Co , has agreed to buy U.S.-based Digital Risk LLC, a mortgage management specialist, for $175 million, it said in a statement on Monday.