The Indian rupee closed at 81.85 per dollar, down 18 points from its previous close of 81.67 on dollar demand from importers and recovery in crude oil prices.
Forex traders said sustained foreign fund outflows and concerns over rising COVID-19 cases in China also weighed on investor sentiments.
At the interbank foreign exchange market, the local unit opened at 81.81 and later witnessed an intraday high of 81.74 and a low of 81.87 during the session.
The domestic unit finally settled at 81.85 against the American currency, registering a fall of 18 paise over its last close of 81.67.
"Indian Rupee depreciated on Dollar demand from importers and recovery in crude oil prices. FII outflows also weighed on Rupee," said Anuj Choudhary - Research Analyst at Sharekhan by BNP Paribas.
However, the soft US Dollar and positive domestic markets cushioned the downside. The US Dollar declined on Tuesday on hopes that the Fed may cool down its pace of rate hikes.
The dollar index, which gauges the greenback's strength against a basket of six currencies, fell 0.21 per cent to 106.99.
Global oil benchmark Brent crude futures advanced 0.91 per cent to USD 89.16 per barrel.
Foreign Institutional Investors (FIIs) were net sellers in capital markets as they offloaded shares worth Rs 697.83 crore on Tuesday, according to exchange data.
"We expect the Rupee to trade with a negative bias on concerns over rising COVID-19 cases in China and hawkish Fed speak. Though some Fed officials hint that they are open to a slower pace of rate hike, the US central bank will not pause its rate hike," Choudhary said.
Traders may take cues from manufacturing and services PMI, durable goods orders and new home sales data. They will remain cautious ahead of the Federal Open Market Committee (FOMC) meeting minutes later today, Choudhary added.
On the domestic equity market front, the 30-share BSE Sensex rose 91.62 points or 0.15 per cent to end at 61,510.58, while the broader NSE Nifty advanced 23.05 points or 0.13 per cent to 18,267.25.
With inputs from Agencies.