The rupee on Thursday recovered from record lows to settle 20 paise higher at 81.73 against US dollar ahead of the RBI monetary policy decision scheduled to come out on Friday.
Heavy capital outflows restricted the rupee gain, traders said.
At the interbank forex market, the local unit opened at 81.60 against the greenback. It witnessed an intra-day high of 81.58 and a low of 81.94 during the session.
It finally ended at 81.73, up 20 paise from its previous close.
On Wednesday, the rupee plunged below the 82-mark for the first time in intraday trade before settling 40 paise down at 81.93 against the dollar.
"In the last hour of trade, the Indian rupee strengthened along with the Chinese Yuan which appreciated after a report of China state bank may stock up for Yuan intervention. However, the month-end rebalancing, foreign fund outflows and dollar demand from the importers limited the gains in the rupee," said Dilip Parmar, Research Analyst, HDFC Securities.
Traders remained cautious ahead of the RBI's monetary policy decision.
"In the near-term, spot USD-INR is having resistance near 82.40 and support at 81.30. A recent, parabolic up move in USD-INR in the last seven days warrants some retracement in the coming days but the directional trend remains up as long as it trades above 80.10," Parmar added.
"Rupee traded strong at 81.75, up 0.23 per cent as the dollar index traded weak overnight. After the gap up opening near 81.50 rupee witnessed some profit before RBI policy announcement due on 30th September 2022," Jateen Trivedi, VP Research Analyst at LKP Securities said.
The dollar index, which measures the greenback's strength against a basket of six currencies, rose 0.55 per cent to 113.22.
Brent crude futures, the global oil benchmark, advanced 0.25 per cent to $89.54 per barrel.
On the domestic equity market front, BSE Sensex ended 188.32 points or 0.33 per cent down at 56,409.96, while the broader NSE Nifty fell 40.50 points or 0.24 per cent to 16,818.10.
Foreign Institutional Investors (FIIs) were net sellers in the capital markets as they offloaded shares worth Rs 3,599.42 crore on Thursday, according to exchange data.