The rupee recovered lost ground on Tuesday as the dollar pulled back from new two-decade highs driven by the narrowing of the interest rate differential gap and expectations of intervention by the Reserve Bank of India.
Bloomberg showed the rupee was last changing hands at 79.8862 per dollar, compared to its previous close of 79.9675, a sharp recovery from a new lifetime low of 80.1288 on Monday.
PTI reported that the rupee gained four paise to 79.87 against the US dollar in early trade.
According to PTI, the Indian currency hit a new all-time weak level of 80.15 in the previous session but ended the day below that 80-per-dollar mark as the Reserve Bank of India stepped in to defend the currency.
"The fight to tame inflation is expected to continue in the distant future and the rate hikes are expected to put pressure on the rupee and other emerging market currencies," Santosh Meena, Head of Research at Swastika Investmart, told ANI.
The dollar index, which compares the dollar value to a basket of six different currencies, with the euro carrying the heaviest weight, was down from its overnight high of 109.48, which had not been reached since September 2002, to 108.65 at the start of the Asian session.
Besides a rampant dollar, rising crude prices also weighed on the rupee, as India imports over three-fourths of its oil needs and an increase in international markets weighed heavily on the currency driven by demand for dollars by importers.
Oil held the biggest gain in more than a month on Monday as traders weighed supply concerns, including the possibility of an OPEC+ output cut.
While crude prices slipped on Tuesday after notching their highest gains in more than a month in the previous session, they have largely retained gains on the expectation of supply reductions ahead of a producers' conference on September 5.
Brent is now hovering near $104.50 a barrel, a sizeable recovery from its recent low of around $91.50.
Oil prices "back on an upward trajectory" is an issue for the rupee, a trader at a Mumbai-based bank told Reuters.
"However, if the rupee, after all the negative cues, still managed to hold above 80 yesterday, then there is little reason to chase the pair (USD/INR) higher," added the trader.