The Indian rupee recovered a large part of its losses on Thursday, helped by dollar sales from a corporate and exporters, but disappointment over lack of any specific measures from the government prevented a further rise.
Finance Minister P. Chidambaram's attempt to win back market confidence by pledging new reform measures and talking up the economy disappointed investors.
"The market was looking for some concrete steps but there was nothing concrete announced by the finance minister, hence the sell-off," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.
"At higher levels, however exporters came in to sell, helping the rupee recover quite a bit."
The partially convertible rupee closed at 57.98/99 per dollar, off the day's low of 58.56 but still weaker than Wednesday's close of 57.79/80.
A sell-off in global markets had hurt the domestic share market and the rupee early on but losses were limited on hopes the finance minister would announce some steps to prevent the rupee from sliding towards record lows by attracting foreign capital.
Domestic shares, however, fell for a third consecutive session to close at their lowest level since April 17.
Japanese stocks plunged over 6 percent to bear market territory and Asian shares slid to nine-month lows, as investors rushed for the exits as the prospect of reduced stimulus from central banks roiled markets.
"There was an initial inflow of $200 million with a corporate and later exporters took charge, helping the rupee recover," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank.
"I am expecting further dollar selling till the previous high of 57.30, which could be a short-term support. There is expectation the government may come up with policy decisions soon, so that should help. New range is 56-59," he added.
Traders said a fall in the dollar versus major currencies also helped the rupee's recovery by pushing the offshore non-deliverable forward rates down. The index of the dollar against six majors was down 0.26 percent.
In the offshore market, the one-month contract was at 58.35 while the three-month was at 58.99.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 58.10 with a total traded volume of $7.19 billion.