The rupee came off one-month lows to end higher on Monday, as late inflows related to foreign funds selling dollars outweighed demand from oil importers and weak Asian currencies which were weighed down by continued worries about the potential for competitive devaluations.
Flows are expected to determine near-term movements as investors wait for the 2013/14 budget to be unveiled on Feb. 28.
A budget that soothes foreign investors could help support the rupee as the current account deficit is near record highs and the scope of monetary easing remains limited.
India's central bank chief struck a hawkish note on Saturday and said there are upside risks to inflation from food and commodity prices, while calling room for monetary easing "limited."
"Profit taking by some custodial banks and also small selling interest from some corporates took spot to close at 54.1800," said Ashis Barua, forex dealer at IndusInd Bank.
If the dollar weakens against other majors, the rupee may gain to 53.75-53.80 levels on Wednesday, he added. The local forex market is closed on Tuesday for a local holiday.
The partially convertible rupee closed at 54.185/195 per dollar versus its previous close of 54.22/23. It fell to 54.44 in the session, its lowest since Jan. 17.
The soft tone in regional markets came after G20 leaders over the weekend refrained from singling out Japan over its policy to weakn the yen, while its promises not to devalue currencies was seen doing little to lead to stable exchange rates.
The rupee was supported by dollar selling by custodian banks in a session in which domestic shares edged higher, recovering from the 2013 lows hit on Friday.
In the offshore non-deliverable forwards the one-month contract was at 54.51, while the three-month was at 55.12.
In the currency futures market, the most-traded near-month dollar/rupee contract on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 54.31 with a total traded volume of $4.6 billion.