The rupee fell on Wednesday, retreating from its one-month high hit in the previous session, due to a pick-up in dollar demand from oil importers and a fall in the euro.
At 10:37 a.m. (0507 GMT), the rupee was at 51.80/81 to the dollar, 0.2 percent weaker than Tuesday's close of 51.70/71 - the highest level since December 8.
There is dollar demand from some oil importers. But I see the dollar coming under selling pressure soon as flows into debt have been strong and some more (inflows) are expected, said Hari Chandramgathan, a foreign exchange dealer with Federal Bank in Mumbai.
Local currency dealers follow movement in the euro closely for cues on global risk appetite and a fall in the single currency on Wednesday also weighed on the rupee, traders said.
The BSE Sensex was up 0.2 percent in choppy trade.
But many traders, including Federal Bank's Chandramgathan, expect the rupee to rebound to 51.40 in the coming sessions, primarily on dollar inflows.
Foreign funds have been buying government debt aggressively before limits on the amount of bonds they can buy expire in mid-January.
The buying interest from these funds has increased to take advantage of the high interest rates, which are expected to fall soon as monetary authorities seek to boost faltering growth.
Net inflows into Indian debt so far in January stand at about $1.65 billion, compared with about $213 million for equities, according to the Securities and Exchange Board of India data released till Jan 10.
Traders said the outlook on dollar inflows has improved a notch further after the government liberalised the country's single-brand retail sector and this move would underpin the rupee.
On Tuesday, India formally eliminated restrictions on foreign investment in its single-brand retail sector.
One-month offshore non-deliverable forward contracts were quoted at 52.14, indicating some weakness in the short-term in the onshore spot rate.
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 were all around 52.02 on total volume of $1.38 billion.