Indian rupee on Thursday rallied to trade below 42-mark initially but could not sustain the gains and closed cheaper by four paise at 42.13/14 against the US currency as a heavy demand for the greenback emerged from oil refiners amid a downtrend in local stocks.

Initially, the domestic unit surged past the 42-level to hit a 10-week intra-day high of 41.82 in anticipation of fresh capital inflows following indications that the government would relax FDI limits in sectors like insurance.

In high volatility at the Interbank Foreign Exchange (forex) market, the rupee fluctuated between 41.82 and 42.20 during the day after resuming firm at 41.92/93 a dollar from its last close of 42.09/10 a dollar.

Forex dealer said oil corporates stepped up dollar buying for their month-end import payments amid easing global crude oil prices, which traded around USD 124 a barrel in Asian trade today.

They said exporters also sold dollars but the supplies were inadequate, putting pressure on the rupee.

The rupee premiums on forward dollar continued to rule weak and closed down on sustained receiving by exporters.

The benchmark six-month forward dollar premium payable in December ended at 87 - 89 paise, slightly lower from 90 -92 paise on Wednesday and the far-forward maturing in June also closed down at 153 - 156 paise from 161 - 163 paise previously.

The Reserve Bank of India fixed the reference rate for the US currency at Rs 41.96 and for the Single European Currency at Rs 65.82.

Meanwhile, Foreign Institutional Investors bought shares worth about USD 405 million on July 23.

Indian benchmark Sensex was down 165 points or 1.11 per cent in a cautious trade.