Snapping the two-day fall, the rupee today recovered 16 paise against the dollar to close at 56.08 after slipping to a record low of 56.52 on exporters selling the US currency to lock profits.
At the Interbank Foreign Exchange (Forex) market, the rupee opened weak at 56.50 and soon dipped further to a new low of 56.52 after poor GDP data and weak show in stocks hit the sentiment.
After rising to a high of 55.74 intra-day, the rupee finally closed at 56.08, up 16 paise over its previous close of 56.24. This cuts short rupee's two-day fall in which it had lost a massive 106 paise or 1.90%.
However, for the month as a whole, rupee depreciated 6.34% in May, the worst monthly performance in 6 months.
"Today's rupee movement was reflective of a month-end phenomenon. However, after the domestic currency touched Rs 56.50 level, exporters started selling dollars. There were also some selling of dollar by public sector banks," said N S Venkatesh, Head of Treasury, IDBI Bank.
The dollar extending losses against the euro on anticipation of an Irish vote in favour of Europe's fiscal pact helped support the rupee. Dealers said besides this, talk of RBI asking oil firms to buy dollars from state-run banks also aided the rupee.
"Today, rupee movement was mainly due to the rumour in the market that RBI has asked oil companies to buy dollar from four state run banks, after which Foreign banks started liquidating their position. But, clarification came from the central bank denying such a move," said T S Srinivasan, GM (Treasury), Indian Overseas Bank.
Meanwhile, though stock market barometer Sensex closed in the red but a late recovery in stocks also helped the rupee. The BSE index finally ended 93.62 points lower, recovering from a fall of over 225 points intra-day.
According to Pramit Brahmbhatt, CEO, Alpari Financial Services (India) said the slowest pace of GDP growth shall prompt the RBI to go in for rate cut in their next credit policy review on June 18 and can even take necessary step even before that to stem growth in economy.
"The dollar index retreated from its high of 83.11 towards 82.70 levels on better than expected French consumer spending and German unemployment numbers. The CPI flash inflation estimates has also been lower thereby allowing the ECB to go in for rate cuts to boost growth in EU," Brahmbhatt said.
Abhishek Goenka, CEO, India Forex Advisors said the rupee has depreciated 14% from its 2012 high, which adds to the concerns of rising import bill, putting pressure on the trade and current accounts.
"The higher inflation, sluggish growth, poor flows and the dollar index strengthening above 82 levels will continue to drive the rupee to new lows. With limited forex reserves and no major expectation of reforms, its important for the government to convince investors about the local growth story to attract more dollar inflows to support rupee," he added.
The premium for the forward dollar felll back on fresh receivings by exporters.
The benchmark six-month forward dollar premium payable in October declined to 138-140 paise from overnight close of 144-145 paise and far-forward contracts maturing in April also tumbled to 262-264 paise from 288-290 paise.
The RBI fixed the reference rate for the US dollar at 56.4225 and for euro at 69.9513.
The rupee also recovered sharply against the pound sterling to 86.97 from yesterday's close of 87.75 and also recouped to Rs 69.61 per euro from 70.04. It rose against the Japanese yen to 71.19 per 100 yen from last close of 71.11.