The rupee fell on Monday, retreating from an over one-week high hit earlier in the session, as relief from domestic trade data showing a rise in exports failed to offset the global strength in the dollar after a stronger-than-expected U.S. jobs data.
India's exports rose 4.25 percent in February from a year earlier, narrowing the trade deficit to $14.92 billion and alleviating some concerns about the current account deficit.
Investors are gearing up for the Reserve Bank of India's policy review on March 19, and industrial output data due on Tuesday and wholesale price inflation on Thursday will be important in setting expectations.
Some concerns that the RBI will remain hawkish on interest rates remained after central bank Governor Duvvuri Subbarao on Friday rejected the notion that high inflation is the "new normal."
"There is greater comfort on the current account deficit given the dilution in headwinds from external sector," said Moses Harding, head of asset liability management at IndusInd Bank.
"The risk for rupee at this stage is from RBI's hawkish guidance on monetary policy and general dollar strength against major currencies."
The partially convertible rupee closed at 54.41/42 per dollar versus its previous close of 54.285/2950.
The rupee rose to as high as 54.17 during the day, its highest since February 28, after the trade data.
However, the rupee was unable to sustain the gains as the dollar held near a 3-1/2-year high against the yen and was steady against other major currencies on Monday after U.S. jobs data last week added to optimism about the world's largest economy.
Mild losses in domestic shares after four sessions of gains and dollar demand from oil refiners also kept the rupee subdued, dealers said.
The rupee may find some support from the government's asset sales in March, which is expected to garner about $880 million.
In the offshore non-deliverable forwards, the one-month contract was at 54.82, while the three-month was at 55.42.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 54.63 with a total traded volume of $5.6 billion.