The rupee appreciated 6 paise to close at 82.70 against the U.S. dollar on Tuesday, as a weak American currency against major rivals overseas boosted investor sentiments.
However, muted domestic equities, unabated foreign capital outflows and rising crude prices restricted the rupee's rise, forex dealers said.
At the interbank foreign exchange market, the local unit opened strong at 82.68 and touched an intra-day high of 82.62 and a low of 82.80 against the greenback.
It finally settled at 82.70, up 6 paise over its previous close of 82.76.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, slipped 0.08% to 103.54.
Global oil benchmark Brent crude futures rose 1.69% to $82.36 per barrel.
On the domestic equity market front, the 30-share BSE Sensex declined 220.86 points or 0.37% to end at 60,286.04, while the broader NSE Nifty slipped 43.10 points or 0.24% to 17,721.50.
Foreign Institutional Investors (FIIs) were net sellers in the capital markets on Monday as they offloaded shares worth ₹1,218.14 crore, according to exchange data.
This week, the key trigger for the markets is likely to be the decision of the RBI's Monetary Policy Committee on the interest rate that will be announced on Wednesday.
S&P Global Ratings on Tuesday said core inflation in India has been declining sequentially, and an elevated 6.25% policy rate limits the need for further rate hikes.
Economists at SBI said they expect the Reserve Bank of India (RBI) to hit the pause button on an interest rate hike at its upcoming monetary policy review.
However, according to some experts, the RBI is likely to settle for a smaller 25 basis points repo rate hike as retail inflation is showing signs of softening and the U.S. Fed moderating the pace of increase in its benchmark interest rate.