The rupee failed to sustain gains made following better-than-expected wholesale price inflation data as importers, particularly oil firms, stepped in to buy dollars finding current levels attractive.
The headline inflation eased to a five-month low in December on lower vegetable prices, providing some relief to the ruling coalition before a national election and increasing the odds that interest rates will stay on hold this month.
The better-than-hoped retail and wholesale inflation helped the rupee head towards recently touched one-month highs, but importers quickly jumped in to buy the greenback.
"These are very good levels to buy.
“As long as importer demand is in the market, I do not see the rupee gaining much. 61 to 62.50 range should hold for the next month," the chief dealer at a mid-sized state-run bank said.
"Importers came into buy forwards as well as they want to be covered ahead
The partially convertible rupee closed at 61.54/55 per dollar, little changed compared to 61.55/56 on Monday.
Bonds and forex markets were closed on Tuesday for a religious holiday.
The unit moved in a range of 61.4250 to 61.7150 during the day.
However, gains in the domestic share market and bonds helped recover from the session lows and prevent further losses.
Foreign fund inflows into the debt and stock markets have been a key determinant of the rupee's fortunes.
So far in 2014, foreigners have pumped in $132.90 million into the stock market while debt buying has reached $1.98 billion.
The BSE Sensex rallied to mark its highest close in five weeks as rate-sensitive stocks such as ICICI Bank rose after data showing sharply easing inflation reinforced expectations the RBI will keep interest rates on hold.
In the offshore non-deliverable forwards, the one-month contract was at 61.96 while the three-month was at 62.77.
