The rupee rose on Wednesday, but gave up most gains on the back of strong dollar demand from state-run banks intended to be channelled to pay the government's defence payment requirements and concerns about tighter monetary policy in China.
Dollar demand from a large petrochemical company also kept the rupee's gains in check, after the partially convertible currency had tracked gains in other emerging market currencies in the morning after worse-than-expected U.S. monthly jobs data.
A less healthy employment report is expected to force the Federal Reserve to delay any tapering of its monetary stimulus until next year.
Still, the impact globally was largely diffused after a policy adviser to the People's Bank of China told Reuters the authority may tighten cash conditions in the financial system to address the inflation risks, while the central bank refrained from supplying cash to money markets for the second day running.
"Risk correction in global markets rubbed the Indian shores, pressurising the equities and weakening the rupee. Importers added to the rupee's woes," said Vikas Babu Chittiprolu, a dealer at Andhra Bank.
The rupee closed at 61.59/60 per dollar, compared with 61.655/665 on Tuesday. It traded in a 61.05-61.67 band in the session.
The rupee was also pressured as local shares fell, with the Nifty falling 0.4 percent due to profit-taking.
Still, on a more positive note, foreign investors continued to buy into Indian stocks for a thirteenth session on Tuesday, buying shares worth $129.48 million.
In the offshore non-deliverable forwards, the one-month contract was at 62, while the three-month was at 63.01.
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 61.71 with a total traded volume of $2.3 billion.