The rupee pared its initial gains and settled 3 paise lower at 79.81 against the US dollar on Monday, weighed down by the strength of the greenback in the overseas market.
A fall in crude oil prices and foreign fund inflows into equity markets, however, restricted the rupee losses.
At the interbank forex market, the local unit opened at 79.70 against the greenback. It witnessed an intra-day high of 79.59 and a low of 79.81 during the session.
It finally ended at 79.81, down 3 paise from its previous close of 79.78.
The dollar index, which measures the greenback's strength against a basket of six currencies, rose 0.26 per cent to 110.05.
Brent crude futures, the global oil benchmark, declined 1.52 per cent to $89.96 per barrel.
"Dollar has been on a rampage against the Chinese yuan and further weakening of the yuan will be a dangerous sign for risk markets and Asian currencies," said Dilip Parmar, Research Analyst, HDFC Securities.
Along with the weak regional currencies, the rupee depreciated against the US dollar for the fourth day in a row. However, the momentum remained lacklustre in the rupee as the economy is better placed among Asian countries.
On the overseas front, risk assets extended their decline and the dollar rallied against major trading partners ahead of a busy week for global central banks, Parmar said, adding that in the near-term, spot USD-INR is expected to trade in the range of 79.05 to 79.90.
"Rupee continued to consolidate in a narrow range despite gains in domestic equities. Volatility remained low ahead of the important Federal Open Market Committee (FOMC) policy statement that will be released later this week," said Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services.
The US Fed Governor could maintain a hawkish stance and that could keep the dollar supported, Somaiya said, adding that the USDINR (Spot) is likely to trade sideways and quote in the range of 79.40 and 80.05.
According to Anuj Choudhary - Research Analyst at Sharekhan by BNP Paribas, Indian rupee appreciated on positive domestic markets and a weak crude oil.
There are rising concerns of an aggressive rate hike in the upcoming FOMC meeting on September 21 on the back of hotter than expected inflation. There are rising odds of a big 100 bps rate hike from earlier expectations of a 75 bps rate hike.
"Overall, we expect the rupee to trade with a negative tone as rate hike expectations are likely to keep the Dollar index strong which will be negative for Rupee.
"A large rate hike may put pressure on global equities which may lead to outflows by FIIs from emerging markets to the US. However, volatility may remain subdued in absence of any major economic data today. USDINR spot price is expected to trade in a range of Rs 79.20 to Rs 80.30 in next couple of sessions," Choudhary said.
On the domestic equity market front, the BSE Sensex ended 300.44 points or 0.51 per cent higher at 59,141.23, while the broader NSE Nifty gained 91.40 points or 0.52 per cent to 17,622.25.
Foreign Institutional Investors (FIIs) were net buyers in the capital markets, as they bought shares worth ₹312.31 crore on Friday, according to exchange data.
On the domestic macroeconomic front, gross direct tax collections grew 30 per cent to Rs 8.36 lakh crore till September 17 of current fiscal year on higher advance tax mop-up buoyed by the economic revival post pandemic, the finance ministry said on Sunday.
Meanwhile, the country's foreign exchange reserves declined by$2.234 billion to $550.871 billion for the week ended September 9, the Reserve Bank of India (RBI) said on Friday.