The rupee posted its first fall against the dollar in six sessions on Tuesday, retreating from a seven-month high hit early in the session, after Reuters reported the government has put on hold plans to list domestic debt on global bond indexes.
The rupee's fall was further accelerated as shares snapped a five-day winning streak, with the Nifty ending down 0.4 percent after hitting its third consecutive record high earlier in the session.
Some caution is also expected to set in ahead of industrial output and consumer inflation data due after the close of markets on Wednesday, two key reports that come ahead of the Reserve Bank of India's policy review on April 1.
The reports could help determine whether the recent optimism about the rupee is justified, given the rally across Indian markets since last week has been predicated on rising hopes for the economy, a sharply narrower current account deficit, and easing inflation.
"Going by the momentum, the rupee is likely to go to 59 in the near period," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.
The partially convertible rupee closed at 60.94/95 per dollar compared to 60.85/86 on Monday.
The rupee rose as high as 60.5925, its strongest since August 12, but retreated after Reuters reported India put on ice plans to join major emerging market bond indexes, signalling easing concerns about the rupee and balance of payments.
Foreign flows will also remain important in the near term.
Although foreign institutional investors on Monday bought a net $211.6 million worth of shares in secondary markets, heavy selling in primary markets turned them into net sellers of $612 million for the day, halting a 16-day consecutive buying streak.
In the offshore non-deliverable forwards, the one-month contract was at 61.31 while the three-month was at 61.96.