However, FII outflows of Rs 545 crore capped the gains in the rupee, which had slumped by 126 paise in the past two days.
At the Interbank Foreign Exchange (Forex) market, the domestic unit commenced better at 58.74 a dollar from previous close of 58.77, which is its all-time low on a closing basis.
However, in a session marked with volatility the rupee moved erratically in a range of 58.61 and 58.91 against the US dollar. It ended at 58.70, a rise of 7 paise or 0.12 per cent.
Traders are hoping Fed Chairman Ben Bernanke will continue with the plan to buy USD 45 billion in treasuries and USD 40 billion in mortgage-backed securities each month.
However, any signal that Fed plans to taper off the purchases will impact inflows into emerging market assets, they added.
"Huge debt outflows from the Indian markets have led to weakness in the rupee since last one month. Along with the rupee, all the other emerging nations' currencies are seen weakening against the US dollar amid increased uncertainty over Fed's decision regarding tapering the QE," said Abhishek Goenka, Founder & CEO, India Forex Advisors.
The dollar index, a gauge of six major global rivals, was down by 0.06 per cent.
Meanwhile, the BSE Sensex, which was down by nearly 125 points, closed up by 22.42 points.
Rupee had touched lifetime low of 58.98 against US dollar on June 11. It fell from 53.8 levels at the end of May and is among the worst performing Asian currencies this year.
On Tuesday, the finance ministry proposed sweeping changes in the FDI regime, favouring higher sectoral caps in almost all sectors including defence, multi-brand retail and telecom. The recommendations are seen as moves to help attract dollar inflows and help the local currency recover.
According to a Goldman Sachs report, a weak rupee will impact "companies with material foreign debt or significant imports and no natural hedge in the form of export revenue."
Meanwhile, premium for forward dollar fell back slightly on fresh receipts by exporters.
Benchmark six-month forward dollar premium payable in November eased to 150-1/2-152 paise from Tuesday's close of 151-1/2-153-1/2 paise.
Far-forward contracts maturing in May also declined to 304-306 paise from 307-309 paise.
The RBI fixed the reference rate for the US dollar at 58.7445 and for the euro at 78.6996.
Rupee softened further against the pound sterling to 91.83 from overnight close of 91.80 and also slipped against the euro to 78.64 from 78.59.
It too moved down against the Japanese yen to 61.76 per 100 yen from previous close of 61.67.