The rupee pared most of its initial losses to close down by 4 paise at 82.82 (provisional) against the U.S. currency on February 15 on lower trade deficit data for the month of January.
Forex traders said a stronger American currency in the overseas markets capped the appreciation bias.
At the interbank foreign exchange market, the rupee opened lower at 82.90 against the greenback amid early losses in domestic equities.
The local unit recovered some ground later in the day in line with equities to close at 82.82 (provisional), down 4 paise over its previous close of 82.78.
During the session the domestic unit witnessed an intra-day high of 82.79 and a low of 82.90 against the American dollar.
According to Anuj Choudhary - Research Analyst at Sharekhan by BNP Paribas, the rupee erased earlier losses on upbeat trade deficit data.
India's trade deficit in January fell to a 12-month low of $17.75 billion as imports declined by 3.63% year-on-year to $50.66 billion. Exports in January dipped by 6.58% to $32.91 billion, as against $35.23 billion a year ago.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.21% higher at 103.45.
"Dollar strengthened as CPI data from U.S. printed at 6.4% in January, above estimates of 6.2 per cent, but slightly lower than 6.5% in December, signaling that sticky inflation may keep interest rates holding on at higher levels for longer," Choudhary said.
Global oil benchmark Brent crude futures declined 1.22% to $84.54 per barrel.
"We expect the rupee to trade with a negative bias on strength in the Dollar index amid expectations of positive economic data and concerns over hawkish Fed. However, narrowing trade deficit with FII inflows may support rupee at lower levels," Choudhary added.
The 30-share BSE Sensex ended 242.83 points or 0.40% higher at 61,275.09, while the broader NSE Nifty advanced 86.00 points or 0.48% to 18,015.85.
Foreign Institutional Investors (FIIs) were net buyers in the capital markets on Tuesday as they purchased shares worth ₹1,305.30 crore, according to exchange data.