The rupee retreated from a near three-month high on Monday, weighed by weak equities, dollar demand from a local steelmaker and oil importers.
Traders also awaited a debt deal between Greece and its private creditors for further clues on the local currency.
Global risk appetite is a key driver for the rupee, which has strengthened 7.3% this month, on a sharp rise in foreign fund investments in local shares and debt, after falling 16% in 2011.
The rupee closed at 49.79/80 to the dollar, weaker than Friday's close of 49.305/315, when it rose to 49.2975, a level last seen on November 8.
"The risk appetite is seen lower ahead of the European Union summit, so we saw rupee lose strength along with equities," said Hari Chandramgathan, a forex dealer with Federal Bank in Mumbai.
An agreement to restructure private holdings of Greek debt is unlikely to be reached in time for the summit, at which euro zone leaders are expected to sign off on a permanent rescue fund for the euro zone and agree on inserting a balanced budget rule into national legislation.
"There was good demand for dollars from corporates and oil importers," Chandramgathan said.
Traders said banks bought about $400 million, most likely for JSW Steel, the No. 3 steelmaker in the country.
The BSE Sensex slumped 2.15% on Monday, their sharpest fall in about six weeks, ending a six-session rally as investors booked profits after concerns over growth in Asia's third-largest economy resurfaced.
Chandramgathan said the rupee has support around 50.30 to the dollar, which is expected to be touched by end of this week.
Foreign funds have bought Indian shares worth $1.8 billion so far in January, and invested $3.4 billion in debt, according to Securities and Exchange Board of India.
In a report on Sunday, professional services firm Ernst & Young said foreign direct investment in India is set to swell in coming years as investors search for growth.
One-month offshore non-deliverable forward contracts were at 49.78.
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 were around 50.14 on total volume of $4.3 billion.