The rupee pared its initial losses and closed with slim gains in the first trading session of 2022 on Monday, tracking positive domestic equities.
Forex traders said growing concerns over the Omicron variant of coronavirus and its impact on economic recovery as well as firm crude oil prices weighed on the rupee.
At the interbank forex market, the local unit opened at 74.35 against the greenback and witnessed an intra-day high of 74.25 and a low of 74.47.
The domestic unit finally settled at 74.28, registering a gain of just 1 paisa over its previous close.
The local unit had settled at 74.29 on the last trading day of 2021.
"Rupee started the year on a steady note, supported by stronger regional currencies and domestic equities...," said Dilip Parmar, Research Analyst, HDFC Securities.
Parmar further noted that "dollar selling has been seen from local banks on behalf of exporters and expectation of better inflows from primary markets could continue this quarter as well. The market is pricing for around Rs 44,000 crore from IPO this quarter."
On the domestic equity market front, the BSE Sensex ended 929.40 points or 1.60 per cent higher at 59,183.22, while the broader NSE Nifty advanced 271.65 points or 1.57 per cent to 17,625.70.
Meanwhile, the dollar index, which measures the greenback's strength against the basket of six currencies, advanced 0.11 per cent to 95.77.
Brent crude futures, the global oil benchmark, rose 1.25 per cent to USD 78.75 per barrel.
Foreign institutional investors were net buyers in the capital market on Friday, as they purchased shares worth Rs 575.39 crore, as per exchange data.
According to Jateen Trivedi, Senior Research Analyst at LKP Securities, "good secondary market participation gave a positive trigger but strength in the dollar index kept the rupee in a small range. Going ahead range for the rupee can be between 74.10-74.55."
"The Indian Rupee appreciated for a third straight session against the US dollar tracking upbeat local equities and weak Dollar this Monday," said Sriram Iyer, Senior Research Analyst at Reliance Securities.
However, importers' dollar demand and speculation that the Reserve Bank of India (RBI) may not allow the local currency to appreciate from current levels limited gains, he added.
The US Fed minutes, due Thursday, and the December jobs report from the US on Friday will be the driving factors this week.
On the domestic macroeconomic front, India's current account slipped into a deficit of USD 9.6 billion or 1.3 per cent of GDP in the September quarter, the Reserve Bank said on Friday.
The current account, which records the value of exports and imports of both goods and services along with international transfers of capital, was in a surplus mode both in the quarter-ago and year-ago periods.
Meanwhile, India's manufacturing sector activities moderated in December but output remained in the growth territory, amid a slower rise in sales and new orders, a monthly survey said on Monday.
The seasonally adjusted IHS Markit India Manufacturing Purchasing Managers’ Index (PMI) eased to 55.5 in December, from November's ten-month high of 57.6.