The rupee strengthened early on Wednesday following a reversing of losses in the previous session, a day after closing at its all-time low of 77.44 against the dollar.
Bloomberg reported the rupee was last changing hands at around 77.19 per dollar, and the front-end futures contract on the NSE showed bets in favour of the currency, with it quoted at 77.20 against the dollar after opening 77.3225 on Wednesday.
PTI reported the rupee gained 17 paise to 77.17 against the US dollar in early trade.
On Tuesday, the currency snapped two days of sharp losses and appreciated 10 paise to end at 77.34 against the US dollar, supported by a rebound in regional currencies and a fall in crude oil prices.
Traders also said the Reserve Bank of India may have intervened after the rupee plunged to its lifetime low of 77.44 on Monday.
But the volatility is expected to be high on Wednesday ahead of US inflation data, which is predicted to show some respite after blowout figures in the previous months.
Still, the US Federal Reserve is poised to aggressively hike rates this year, with rate futures indicating a near 80 per cent chance of a 75-basis-point lift in June.
"We expect the rupee to remain volatile in today's session ahead of the US inflation data and could face steep resistance around 77.00 levels, while upside support is at 78.10," said Rahul Kalantri, VP for Commodities at Mehta Equities.
"The dollar index witnessed high volatility and extended gains to settle at 103.935, a gain of 0.15% on Tuesday. The dollar index extended its gain after a US Federal Reserve member said that 75 basis point rate hikes could be seen in the next policy meetings," he added.
Capital outflows from emerging markets are the fallout of aggressive US monetary policy. Investors tend to shelter in American assets during a rate hike cycle in anticipation of the resultant slowing in economic activity.
Like other emerging market nations, India has witnessed sharp outflows from its capital markets, which have hurt the rupee and the country's foreign exchange reserves in recent weeks.
The exodus of foreign capital is not likely to reverse anytime soon as the Russia-Ukraine war shows no signs of abating.
While the RBI has intervened, a Bloomberg report showed analysts expect the central bank to mount a more limited defence, aiming to stem the rupee's losses from the worst of speculative attacks when capital flows are shifting globally with the Fed set to hike through this year.
India's forex reserves have fallen below $600 billion for the first time in a year, weighed by persistent capital outflows and the rupee's weakness driven by the dollar's broad surge in recent months.
FX reserves have declined for eight weeks in a row, with nearly $34 billion, or about 5.4 per cent, wiped out since Russia invaded Ukraine on February 24.
"The RBI will be careful to fight cavalier speculators, and not the Fed,” Vishnu Varathan, head of economics and strategy at Mizuho Bank, told Bloomberg.
“That is to say, prudence warns against trying to defy broad-based dollar trends. Afterall, a $600 billion plus reserve coffer is harder to build than it is to burn,” he added.