The rupee ended marginally higher by 2 paise at 66.59 against the US dollar on mild selling of the American currency by exporters and banks.
The domestic unit resumed higher at 66.54 as against the last Friday's closing of 66.61 at the Inter-bank Foreign Exchange (Forex) market and strengthened further to 66.45 on sustained bouts of dollar selling.
However, the uptrend was restricted due to the dollar's strength against other major currencies overseas and gave away most of its early gains before ending at 66.59, showing a rise of 2 paise, or 0.03 per cent.
The domestic currency hovered in a range of 66.60 and 66.45 during the day.
The rupee had staged a resounding comeback to close higher by a whopping 24 paise at 66.61 on last Friday.
There is an expectation in the market that the RBI may go for a rate cut in its bi-monthly policy meet tomorrow after a decline in retail inflation in August to 5.05 per cent. The central bank had cut interest rate by 25 bps in its April review.
This will be the first meeting under new RBI governor Urjit Patel backed by the recently formed Monetary Policy Committee (MPC).
On the global front, the greenback traded firmly higher against the other major currencies on the back of upbeat US marco-economic data.
The dollar index was trading up by 0.08 per cent at 95.46 as against a basket of six currencies in late afternoon trade.
The RBI today fixed the reference rate for the dollar at 66.5330 and euro at 74.7166.
In cross-currency trades, the rupee gained further ground against the pound sterling to settle at 85.70 as compared to 86.41 and also firmed up further against the Japanese yen to finish at 65.70 from 65.83 per 100 yens.
It, however fell back against the euro to end at 74.81 from the weekend level of 74.40.
In the meantime, country's foreign exchange reserves increased by USD 1.166 billion to reach USD 370.766 billion for the week to September 23.
Fiscal deficit in the first five months of the current fiscal stood at Rs 4.08 lakh crore, which was 76.4 per cent of Budget estimates for 2016-17, the government data showed last Friday. (MORE) Meanwhile, equity markets staged a strong recovery today
after last week's massive sell-offs on buoyant expectations of a rate cut ahead of the RBI policy meet on Tuesday.
The market benchmark BSE Sensex shot up 377.33 points to end at 28,243.29, while broader Nifty jumped 126.95 points to 8,738.10.
In the forward market, premium for dollar continued to rule weak due to sustained receiving by exporters.
The benchmark six-month premium for March declined to 185-187 paise from 188-190 paise and the forward-September 2017 contract also dropped to 364-366 paise as compared to 369-371 paise earlier.
Crude prices surged ahead to its highest level since August to trade above the psychological USD 50 a barrel, supported by a planned production cut by exporter club OPEC for the first time since 2008.