The rupee slumped to a historic low of 72.91 in morning trade on Wednesday forcing the RBI to sell US dollars in the market through public sector banks to bring the Indian currency back from the brink.
The government also issued a statement that the rupee would not be allowed to crash to an unreasonable level which further bolstered sentiments and enabled the rupee to climb back to 72.18 vis-a-vis the US dollar at the end of the day to settle at 51 paise higher than the previous day's close.
Despite strong GDP growth, the rupee has weakened by as much as 13.81% to become Asia's worst performing currency this year, hit by higher oil prices and an emerging markets sell-off, widening India's current account deficit and tipping its balance of payments into the red.
There was no fundamental rationale for the rupee to depreciate to the low levels of the previous session, Subhash Garg, the economic affairs secretary, wrote on social network Twitter.
"It (rupee fall) reflected overreaction of market operators. Government and RBI will do everything to ensure that rupee does not slide to unreasonable levels. Today's correction seems to reflect that realisation." The Financial Benchmarks India private limited (FBIL), meanwhile, fixed the reference rate for the dollar at 72.7549 and for the euro at 84.3244.
The forex and money market will remain closed on Thursday because of the 'Ganesh Chaturthi' holiday. In cross currency trade, the rupee also bounced back against the British Pound to close at 93.76.