Concerns over possible negative news from the euro zone, still struggling with its sovereign debt crisis, and an elusive Greek bailout deal meant the surge in the euro was sidestepped, traders said.
The rupee ended at 49.15/16 to the dollar, marginally up from Tuesday's close of 49.19/20, after moving in a wide 48.9850-49.2550 band, an indication of the fragile sentiment.
There was some genuine dollar demand, but the Greek debt deal is keeping it on tenterhooks. So it looks like the market is in a consolidation phase and could stay in a band of 48.80 to 49.50, said Ashtosh Raina, head of forex trading at HDFC Bank.
Greek parties will try again on Wednesday to agree a reform deal in return for a new international rescue to avoid a chaotic default, after delays prompted some EU leaders to warn that the euro zone can live without Athens.
The rupee had run up too much too soon, so the market might be looking to break out and move lower before some strength re-emerges, said a senior currency trader at another private-sector bank.
The local currency gained about 7.4 percent in January after losing nearly 16 percent of its value in 2011 to become the worst performing major Asian currency.
However, most traders do not expect the selling pressure in the rupee to be prolonged.
Inflows remain strong and equities are also holding strong, said a currency trader for a large engineering conglomerate. 48.60 is the key level now. If rupee strengthens past it, we could see a move to 47.50.
Foreign funds have invested $3.6 billion in local equities and $3.2 billion in debt so far this year, data from the Securities and Exchange Board of India showed.
The rupee had touched a four-and-half month high of 48.60 on Monday.
The possibility of active intervention from the Reserve Bank of India in case the rupee goes into a steep slide is seen preventing selling pressure on the local currency.
The RBI has intervened intermittently in the forex market over the past few months and taken steps to cut out speculation and support the currency, which touched a record low of 54.30 on December 15.
Deputy Governor Subir Gokarn said the bank will not buy dollars in the forex market just to infuse liquidity, but to address any volatility in rupee movements.
The one-month offshore non-deliverable forward contracts were at 49.47.
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 around ended around 49.38, on total volume of $5.19 billion.