The rupee ended up marginally higher after hitting a near two-week high on Monday, as dollar demand from importers capped gains.
Asian markets got a lift as the dollar index, which measures the currency against six majors, slid one per cent to fall below 108 due to a strengthening euro on hawkish cues by the European Central Bank.
The partially convertible rupee closed up 0.1 per cent to 79.5225, after touching its highest level since Sept. 1 and recovering from a low of 79.7150 hit earlier.
However, the rupee's gains were not as significant as broader markets.
"On every dip in the USD/INR pair, importers are hedging their positions because everyone is afraid whether the Reserve Bank of India can hold this position (below 80 per dollar) for long," said Ashish Ranade, forex and treasury chief manager at Cosmos Bank.
Market expects the rupee to weaken further, and any appreciation in the local currency is seen only when the Federal Reserve indicates inflation in the United States has cooled down, Ranade added.
Markets awaited inflation data in India, due later in the day, which is expected to surge to 6.9 per cent as food prices climbed, according to a Reuters poll.
Ranade said inflation was likely to be around 6.5-6.6 per cent, which would be below July's reading, and should be a positive for bond markets and the rupee.
Equity inflows that have aided the rupee in recent sessions were expected to persist, he added.
Indian stock markets jumped 0.6 per cent on Monday, taking this month's gains to about one per cent. Until Friday's close, foreign investors bought $700 million worth Indian equities in September after having bought about $6.5 billion last month.