The rupee traded in a narrow range to settle 2 paise higher at 83.95 (provisional) against the American currency on Wednesday, helped by a sharp decline in the US Dollar against major currencies overseas.
Forex traders said a mixed-to-positive tone in the domestic market also supported the rupee.
However, foreign fund outflows and geopolitical tensions in the Middle East restricted the rise in the local unit.
At the interbank foreign exchange market, the local unit opened at 83.90 but soon fell into the negative zone and touched an intra-day low of 83.97 against the American currency.
The domestic unit finally settled at 83.95 (provisional) against the American currency, 2 paise higher from its previous close.
On Tuesday, the rupee settled for the day on a flat note at 83.97 against the US dollar.
"We expect the rupee to trade with a slight negative bias on elevated commodity prices and heightened geopolitical tension in the Middle East between Israel and Iran.
"However, the weak Dollar and rising odds of a rate cut by the US Fed may support the rupee. Positive global markets may also support the rupee at lower levels," said Anuj Choudhary – Research Analyst at Sharekhan by BNP Paribas.
Choudhary further noted that traders may take cues from US CPI data today. "USD/INR spot price is expected to trade in a range of ₹83.75 to ₹84.20," it added.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.13 per cent lower at 102.42.
Forex traders said the US dollar has weakened against majors post the US Producer Price Index (PPI) print, which came in softer than anticipated, leaving the Dollar Index vulnerable to further correction.
Brent crude, the global oil benchmark, advanced 0.28 per cent to $80.92 per barrel.
On the domestic equity market front, Sensex advanced 149.85 points, or 0.19 per cent, to 79,105.88 points. The Nifty rose 4.75 points, or 0.02 per cent, to 24,143.75 points.
Foreign institutional investors (FIIs) were net sellers in the capital markets on Tuesday, as they offloaded shares worth ₹2,107.17 crore, according to exchange data.
On the domestic macroeconomic front, wholesale inflation fell to a 3-month low of 2.04 per cent in July on the decline in prices of food items especially vegetables, government data released on Wednesday showed.