Dear Sijo,

Please follow these steps:

1. Install ruby 1.9.1 (latest patch from ruby site) as you said to a new 
directory using --prefix

2. then install rails using /path_to_new/ruby/bin/gem install rails
No need to specify a install path for 'rails' it will be install on 
New_ruby_path/bin

3. /path_to_new/ruby/bin/rails -v .

*note I used ruby 1.9.1p129 (2009-05-12 revision 23412)

I did this way and this worked for me.

Happy coding!
Anoop
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