The Indian rupee snapped a six-session winning run on Monday, amid thin trading volumes, as dollar bids from state-run lenders outweighed the recent positive momentum.
Indian foreign exchange markets will be closed on Tuesday for a local holiday.
The rupee hit a six-month high of 93.69 per dollar, extending last week's rally of more than 1% but closed slightly lower at 93.9275, from the previous close at 93.9050.
Some traders said state-run banks' dollar purchases could be on behalf of the central bank, whose recent measures have helped address the persistent supply-demand imbalance in the foreign exchange market.
A decline in crude oil prices alleviated pressure on the Indian currency, with foreign investors returning to equities.
Emkay Global's Madhavi Arora expects the Reserve Bank of India to use any sustained improvement in inflows to rebuild its foreign exchange buffers rather than allow a sharp appreciation in the rupee.
The central bank's sizeable net short forward position and India's continuing current account funding needs are likely to cap the currency's upside, she said.
The RBI's net short dollar position in the forward market ballooned to an all-time high of nearly $240 billion in September, leaving it with substantial future dollar commitments.
"The US dollar has strengthened following a stronger-than-expected October jobs report," said Amit Pabari, managing director at FX advisory firm CR Forex.
US non-farm payrolls increased by 165,000 in October against expectations of 65,000, pushing the US 10-year yield higher. A Reuters poll shows US retail inflation likely stood at 3.9% on-year in October. The data is due on Tuesday evening.
"A higher-than-expected reading could strengthen expectations of another Federal Reserve rate hike and provide fresh support to the dollar," CR Forex's Pabari added.
