India's central bank intervened in the currency market on Tuesday to help the rupee steady slightly after the unit weakened to 80.05 per dollar, notching a record low for a seventh successive session.
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A recovery in Indian shares also favoured the rupee.
Like most Asian currencies, the rupee has been falling in recent months as risk aversion has risen on expectations of the U.S. Federal Reserve raising rates aggressively to curb high inflation and prompting investors to flee riskier assets.
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The U.S. dollar too hovered just above a one-week low reached overnight versus major peers as markets reduced the odds of a percentage-point Federal Reserve rate increase this month.
The partially convertible rupee recovered from the low struck earlier to trade at 79.91/92 per dollar by 0536 GMT compared with its close of 79.97 on Monday.
"The rupee is going to weaken further, that is a given. But how soon and how much will depend on the RBI," a senior trader at a private bank said.
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The Reserve Bank of India has been intervening in both the spot and forwards markets to slow the rupee's fall and has taken several measures in recent weeks to boost foreign fund inflows.
But, traders said the rupee was being hurt by a severe dollar shortage and expectations that India's current and trade account deficits will continue to widen.
While a recovery in Indian share markets on Tuesday helped stabilise the rupee, traders warned it could be just a temporary respite.
So far in 2022, foreign investors have made net sales of India shares totalling more than $30 billion, and traders said unless this trend reverses, the downward bias on the rupee would continue.
India's benchmark 10-year bond yield rose too, and was trading at 7.46% compared with the previous close of 7.44%, tracking a rise in U.S. treasury yields.