Persistent capital inflows also aided the rupee rise while the dollar index was almost stable against a basket of six major currencies ahead of the outcome of the two-day policy meeting by the US Federal Reserve starting on Tuesday.
At the Interbank Foreign Exchange (Forex) market, the domestic unit commenced strong at 61.02 a dollar from previous close of 61.13, a one-month low.
It was later trapped in a narrow range of 61.01 and 61.1425 before settling at 61.05, a net rise of eight paise or 0.13 per cent.
On Monday, it had plunged 48 paise, or 0.79 per cent, its biggest fall in more than five weeks.
The Indian benchmark S&P BSE Sensex, after tumbling by 244.48 points or 0.90 per cent on Monday, tanked 324.05 points or 1.21 per cent on Tuesday to end at a three-week low.
FPIs/FIIs bought shares worth $79.57 million on Monday, as per Sebi data.
Pramit Brahmbhatt, Veracity Group CEO said, “Rupee appreciated on Tuesday even as local equities closed down by over one per cent. Rupee movement was aided by lower trade deficit in August. Dollar index rally slowed down on Tuesday, which further supported the rupee. The trading range for the spot rupee is expected to be within 60.50 to 61.50.”