Fresh dollar selling by exporters ahead of two-day Fed's policy meeting starting late today also aided the rupee rise.
At the Interbank Foreign Exchange (Forex) market, the domestic unit commenced weak at 60.35 a dollar from previous close of 60.16. It dropped further to an over seven-week low of 60.51 - a level not seen since April 29, 2014 when it had touched an intra-day low of 60.63.
Rupee later bounced back in line with sharp rise in local equities to close at the day's high of 60.03, a moderate rise of 13 paise or 0.22 per cent.
In straight two previous trading sessions, it had plunged by 91 paise or 1.54 per cent on fears that costlier crude due to Iraq unrest would balloon India's fuel import bill and cause trade deficit to widen.
The dollar index was up 0.06 per cent against rivals.
The benchmark S&P BSE Sensex closed up by 330.71 points, or 1.31 per cent, while FIIs sold shares worth Rs 194.10 crore yesterday, as per provisional data with stock exchanges.
Pramit Brahmbhatt, Veracity Group CEO said: "Rupee traded volatile today. In the first half, it traded weak and made a low of 60.51 taking cues from strong dollar. But in the second half, spot rupee recovered as local equities recouped and closed up by over 1.25 per cent."
"RBI also intervened by selling dollars through state owned banks around 60.50 levels," he added.
RBI Governor Raghuram Rajan's comments also boosted the rupee.
"The rupee was seen gaining after the Reserve Bank of India chief said India was well positioned on the external front to deal with shocks," said Abhishek Goenka, Founder and CEO, India Forex Advisors.
Global attention has turned to the Fed's policy meeting that wraps up on Wednesday. Expectations are for the bank to cut a further USD 10 billion from its monthly stimulus spending and keep interest rates at record lows.
The premium for forward dollar continued its downslide on persistent receipts by exporters.
The benchmark six-month premium payable in November declined to 224-226 paise from 227-229 paise previously.
Far-forward contracts maturing in May, 2015 also softened to 460-462 paise from 462-464 paise.
The Reserve Bank of India fixed the reference rate for dollar at 60.3680 and for the euro at 81.8665.
The rupee also bounced back to 101.19 against the pound from yesterday's close of 102.07 and also edged up to 81.45 per euro from 81.46. It firmed up to 58.85 per 100 Japanese yen from 59.09.