The Indian rupee declined, giving up tepid early gains on Thursday, as importer dollar demand picked up pace.
The rupee ended at 95.54 per U.S. dollar, down 0.1% on the day. The currency reversed gains after briefly touching a high of 95.4050.
"The rupee opened flat, before giving up ground under pressure from month-end dollar demand, short covering by market participants, and a broad risk aversion," Dilip Parmar, a currency research analyst at HDFC Securities said.
"A modest recovery in the dollar index following recent inflation data further dampened momentum."
After Wednesday's bank holiday, the market was absorbing two days of inflows, which added pressure to the one-day USD/INR swap cost, which surged to roughly four times the levels seen in recent sessions, traders said.
The surge reflected heavy dollar liquidity with banks, with inflows from non-resident deposits scheme acting as a key driver.
The RBI's FCNR(B) swap window for fresh deposits is set to shut on Monday, fuelling expectations of heavy inflows in the next couple of sessions.
The RBI told banks they could swap dollars raised from these deposits more than once a week, giving them flexibility to handle large inflows before its subsidised deposit scheme ends.
Traders also pointed to heavy dollar demand at the Reserve Bank of India's reference rate leading to a jump in the one-day swap cost. This jump also fed into the broader forward market and lifted near-term forward premiums.
The rupee had posted its biggest single day rise in almost a month on Tuesday, after benchmark Brent crude oil slipped below $90 per barrel. The contract extended its decline to a fourth day in Asian trading on Thursday on expectations that talks between Iran and Qatar might open the Strait of Hormuz.
