The rupee gained 71 paise to touch an intra-day high of 61.47 a dollar - a level not seen since November 13, 2014 - following a sharp rise in local equities.
The RBI slashed lending rate (repo rate) by 0.25 per cent to 7.75 per cent on softening inflation to revive economic growth, which supported both the stock and the rupee.
Fresh dollar selling by exporters after dollar was trading weak by 0.24 per cent against its major global rivals also aided the rupee recovery.
However, the rupee later dropped on renewed dollar demand from importers and some banks amid fresh capital outflows and it fell back to a low of 62.10 before concluding at 62.06, still showing a rise or 12 paise or 0.19 per cent.
The Sensex jumped by 728.73 points, or 2.66 per cent - logging biggest gains in last five years while FPIs sold shares worth Rs 69.74 crore on Wednesday, as per provisional data.
"RBI intervention as well as dollar short covering after Swiss National Bank removed the price band on currency hit the rupee towards end. The trading range for the Spot USD/INR pair is expected to be within 61.70 to 62.70," Veracity Group CEO Pramit Brahmbhatt said.
Meanwhile, premia closed sharply lower on sustained receipts by exporters.
The benchmark six-month premium payable in June dropped to 202-204 paise from overnight close of 210-212 paise.
Premium on forward contracts maturing in December also dipped to 401-403 paise from 412.5-414.5 paise.
The Reserve Bank of India fixed the reference rate for dollar at 61.7588 and for Euro at 72.6345.
The rupee fell back to 94.67 against the pound from 94.05 previously and declined further to 53.33 per 100 Japanese yen from 53.21.
However, it improved further to 72.72 per euro from 73.02. It, however, fell back to 53.21 per 100 Japanese yen from 52.43 previously.