The rupee strengthened by 2 paise to settle at 71.19 against the US dollar on Wednesday amid easing crude oil prices.
Forex traders said strengthening of the American currency and weak domestic equities dragged the local unit, however easing crude prices supported the rupee and restricted the fall.
The next trigger for the domestic currency will be the Union Budget and RBI Monetary policy, they said.
At the interbank foreign exchange market, the local currency opened on a positive note at 71.17. During the day, it saw a high of 71.16 and a low of 71.24.
The Indian currency finally settled at 71.19, higher by 2 paise against its previous close. The domestic unit had settled at 71.21 against the American currency on Tuesday.
Global crude benchmark Brent was trading 0.48 per cent down at USD 64.28 per barrel.
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"Rupee got support from the lower crude oil prices and foreign fund inflows. Foreign fund inflows heads for the fifth month in trot to USD 1.698 billion," said V K Sharma, Head PCG and Capital Markets Strategy, HDFC Securities.
Sharma further added that "we expect USDINR to trade between 70.80-71.60 levels till month end and the further course of action will depend on upcoming budget and RBI monetary policy".
Rupee was weighed down following weakness in domestic equities as well as in major Asian indices. Most of Asian currencies were under pressure as concerns about a new strain of coronavirus in China took a toll on risk appetite," said Gaurang Somaiyaa, Forex & Bullion Analyst, Motilal Oswal Financial Services.
Four people have died in China while scores more have been infected with the virus.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, rose by 0.06 per cent to 97.58.
"Dollar strengthened against its major crosses ahead of the ECB policy statement and preliminary manufacturing PMI number that will be released later this week," Somaiyaa said.
The 10-year Indian government bond yield was at 6.64 per cent.
On the domestic equity market front, the 30-share BSE index settled 208.43 points, or 0.50 per cent, lower at 41,115.38. It hit an intra-day high of 41,532.29 and a low of 41,059.04. Likewise, the broader NSE Nifty closed 62.95 points, or 0.52 per cent, down at 12,106.90.
Foreign institutional investors sold equities worth Rs 50.08 crore on a net basis on Tuesday, according to provisional exchange data.
The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 71.1825 and for rupee/euro at 78.9907. The reference rate for rupee/British pound was fixed at 92.6222 and for rupee/100 Japanese yen at 64.74.