* Dollar demand from state-run banks erases most of the Indian rupee's early gains.
* USD/INR is at 53.64/65, pulling back from the day's low of 53.375 following the government's announcement of raising import duty on gold, a key source of dollar demand after oil in India. The pair had closed at 53.765/775 on Monday.
* "Market went excessive short in the morning. So there is some covering up now," says a dealer with a foreign bank.
* India has raised the import tax on gold by 2 percentage points to 6 percent to curb purchases and rein in a ballooning fiscal deficit, but industry officials expect only a moderate drop in demand.
* However, the rupee has turned the corner and is seen on a strengthening trend following the recent fiscal and financial reforms undertaken by the government, dealers say.