The rupee rose by 9 paise to close at 81.50 (provisional) against the US currency in a restricted trade on Monday, supported by a weak greenback in the overseas markets and a decline in crude oil prices.
At the interbank foreign exchange market, the local unit opened lower at 81.69 and touched a low of 81.72 against the US dollar in line with losses in the equity markets.
Later, it recovered ground and touched a high of 81.49 before settling at 81.50, shoing gains of nine paise over the previous close of 81.59 on Friday.
The dollar index, which gauges the greenback's strength against a basket of six currencies, declined 0.16 per cent to 101.76.
Global oil benchmark Brent crude futures fell 0.25 per cent to USD 86.44 per barrel.
According to Anuj Choudhary - Research Analyst at Sharekhan by BNP Paribas, a weak Dollar index and a decline in crude oil prices cushioned the downside. Further, FPO-related foreign inflows also supported the rupee at lower levels, he said.
"We expect the rupee to trade with a slight negative bias amid a weak tone in the domestic markets and expectations that the US Dollar may rise on safe-haven appeal," Choudhary said.
Choudhary further said that month-end dollar demand from importers and selling pressure from FIIs may also put downside pressure on the rupee.
"Traders may remain cautious ahead of India's union budget and US FOMC meeting later this week. USDINR spot price is expected to trade in a range of Rs 81 to Rs 82.20," Choudhary said.
On the domestic equity market front, the 30-share BSE Sensex advanced 169.51 points or 0.29 per cent to end at 59,500.41, while the broader NSE Nifty rose 44.60 points or 0.25 per cent to 17,648.95.
Foreign Institutional Investors (FIIs) turned net sellers in the capital markets on Friday as they offloaded shares worth Rs 5,977.86 crore, according to exchange data amid a slump in Indian equities due to Adani Group-led selloff on Friday.
On the domestic macroeconomic front, India's forex reserves increased by USD 1.727 billion to USD 573.727 billion in the week ended January 20, the RBI said on Friday. This is the second consecutive week of rise in the kitty.