The Indian rupee closed slightly weaker on Tuesday as easing concerns about the current account deficit after the country imposed additional curbs on gold imports were offset by good corporate dollar demand.
The rupee is expected to remain within a tight range until investors can get more clarity on the central bank's policy stance following its measures last week to defend the rupee by draining liquidity.
Global factors will also play a role with the dollar traded near a one-month low against a basket of currencies on Tuesday on expectations the U.S. Federal Reserve's monetary policy will stay loose for some time.
"I see stability and also the possibility of INR appreciation in the medium term thanks to improved current account deficit, inflation among other things," said Samir Lodha, managing director at QuantArt Market Solutions.
The partially convertible rupee closed at 59.76/77 per dollar compared with 59.72/73 on Monday.
The unit dropped to a low of 59.87 in late trade, at which point the central bank is suspected to have sold dollars via state-run banks, helping the currency close just marginally weaker.
The rupee was supported after India's central bank moved to tighten gold imports again on Monday, making them dependent on export volumes, with an eye on reducing a record current account deficit, but offered relief to domestic sellers by lifting restrictions on credit deals.
Gains in domestic shares also helped. India's benchmark index rose nearly 1 percent on Tuesday to mark its highest close in 2-1/2 years as consumer goods shares rallied to record highs with investors shifting to defensive stocks in an uncertain economic environment.
Traders said there was good demand for the greenback from all quarters with importers and corporates seen buying the dollar.
However, onshore dollar forward premiums continued to rise as traders speculated rupee liquidity would be further squeezed out in the near-term.
The one-year onshore dollar premium rose to 474.50 points, its highest since June 1998, while the six-month premium shot up to 259.50 points versus 247.50 points.
In the offshore non-deliverable forwards, the one-month contract was at 60.19 while the three-month was at 61.01.
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 around 59.84 with a total traded volume of $2 billion.