The rupee recovered on Tuesday from a one-month low hit in the previous session on bargain-hunting, but sentiment was broadly cautious a day before the outcome of the Federal Reserve's meeting.
The US Federal Reserve meets on Tuesday and Wednesday, and investors will parse the central bank's words closely for any clues on the timing of the first US rate hike in more than eight years.
Emerging market assets are increasingly pricing in the prospect of reduced global liquidity, as seen by the biggest single-day decline of the rupee in nearly one-and-a-half months on Monday.
But traders say the rupee could avoid any major shocks, with the Reserve Bank of India having built hefty foreign exchange reserves and on inflows of longer-term money from overseas into domestic markets.
"The fund flows in the market have been good and hence there is not much panic expected this time around despite the uncertainty about Fed meet," said Unnati Parekh, head of currency derivatives at Kanji Forex, a debt brokerage in Mumbai.
"Any fall in the local unit, will be gradual."
The partially convertible rupee ended at 61.0550/0650 per dollar, compared to its close of 61.13/14 on Monday.
The narrowing of the trade deficit also aided the rupee, with the August number shrinking to $10.84 billion last month from a 12-month high of $12.23 billion in July.
But in the near-term most traders expect the local unit to continue to struggle against the dollar, with some pointing out that the rupee may slide to 61.70-62.00 levels if the key 61.35 level is breached.
In the offshore non-deliverable forwards, the one-month contract was at 61.43 while the three-month contract was at 62.04.
The rupee recovered on Tuesday from a one-month low hit in the previous session on bargain-hunting, but sentiment was broadly cautious a day before the outcome of the Federal Reserve's meeting.