The rupee pared initial gains to settle 7 paise lower at 81.88 against the American currency on Tuesday, as elevated crude oil prices and a muted trend in domestic equities weighed on investor sentiments.

Forex traders said the strengthening of the American currency in the overseas market further dented investor sentiments.

At the interbank foreign exchange, the domestic unit opened at 81.74 against the dollar and touched an early high of 81.67 in initial deals.

The local unit, however, pared initial gains and finally ended the day at 81.88 (provisional), down 7 paise from its previous close.

On Monday, the rupee had settled at 81.81 against the dollar.

Also read: RBI’s dependence on forex intervention gain needs a closer look

The dollar index, which gauges the greenback's strength against a basket of six currencies, advanced 0.12 per cent to 101.46.

Brent crude futures, the global oil benchmark, declined marginally by 0.18 per cent to $82.59 per barrel.

"In the wake of a strong handover of West and Asian currencies, the Indian rupee opened a gap-up, but RBI might have intervened in the market along with the dollar demand from hedgers erasing the gains," said Dilip Parmar, Research Analyst, HDFC Securities.

Inflows of foreign funds and a weaker greenback are likely to benefit the rupee, but a sharp appreciation may not be appropriate when we hold a large amount of foreign exchange reserves ($600 billion), Parmar said.

On the domestic equity market front, the 30-share BSE Sensex closed 29.07 points or 0.04 per cent lower at 66,355.71. The broader NSE Nifty advanced 8.25 points or 0.04 per cent at 19,680.60.

Foreign Institutional Investors (FIIs) were net sellers in the capital markets on Monday as they offloaded shares worth ₹82.96 crore, according to exchange data.

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