The rupee snapped its three-day losing streak to close 2 paise higher at 75.07 against the U.S. dollar on Friday amid expectation of better dollar inflows from upcoming IPOs.
However, the rebound in the rupee was restricted amid weakness in domestic equities, analysts said.
Forex traders said geopolitical tensions, elevated crude oil prices and hawkish US Fed stance also weighed on the local unit.
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At the interbank foreign exchange market, the rupee opened at 75.12 a dollar and witnessed an intra-day high of 74.88 and a low of 75.13.
The domestic unit finally settled at 75.07 against the American currency, up 2 paise over its last close of 75.09.
Meanwhile, the U.S. dollar index, which measures the greenback's strength against the basket of six currencies, rose 0.11% to 97.35.
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"The Indian rupee managed to stabilise after sharp sell-off in the last three days and retraced from one-month low on expectation of better dollar inflows from upcoming IPOs and position downsizing ahead of the Union Budget," said Dilip Parmar, Research Analyst, HDFC Securities.
However, stronger dollar index, elevated energy price and higher bond yields could push local currency lower in the coming days, Parmar added.
During this week, the local currency has depreciated by 64 paise against the U.S. dollar.
Brent crude futures, the global oil benchmark, advanced 0.49% to $89.78 per barrel.
On the domestic equity market front, the BSE Sensex ended 76.71 points or 0.13% lower at 57,200.23, while the broader NSE Nifty declined 8.20 points or 0.05% to 17,101.95.
Foreign institutional investors remained net sellers in the capital market on Thursday, as they offloaded shares worth ₹6,266.75 crore, as per stock exchange data.
According to Sugandha Sachdeva, Vice President - Commodity and Currency Research, Religare Broking, the US Fed was slightly tilted on the hawkish side and markets were spooked on prospects of more-than-expected interest rate increases that boosted the dollar index.
Inflation outlook in the U.S. has worsened amid supply-side bottlenecks, while the recently released strong GDP data for 2021 has underpinned the US Fed's hawkish stance, Sachdeva said, adding that markets are also considering prospects of five rate hikes in 2022 and also speculate a more-than- 25 bps rate increase in March.
"A strong dollar, geopolitical tensions between Russia-Ukraine, the relentless rise in crude oil prices are going to be headwinds for the rupee over the long-term. However, in the near-term, we do see an appreciation bias setting in for the rupee," Sachdeva said.
Gaurang Somaiyaa, Forex & Bullion Analyst, Motilal Oswal Financial Services, said, "Rupee rose after falling in the opening session following short covering in the domestic equities, but gains remained capped as the dollar rose against its major crosses." "Dollar has risen in the last few sessions following hawkish comments from the Federal Reserve Chairman and better-than-expected advance GDP number from the U.S.," he added.
"The Indian Rupee ended marginally stronger against the U.S. Dollar on Friday as importers' dollar demand trimmed the impact of flows related to IPO and a rebound in equities," said Sriram Iyer, Senior Research Analyst at Reliance Securities.
However, for the week the rupee ended weak, tracking the strength of the greenback which rose this week amid prospects of aggressive interest rate hikes by the US Federal Reserve