The partially convertible rupee closed at 49.8250/8350 to a dollar, after touching a high of 49.80 earlier. The unit had closed at 50.02/03 on Friday, when it had dipped to 50.32, a level not seen since April 28, 2009.
"Equities pared gains intraday and the spike in euro was also merely stop losses getting hit in short positions above 1.3920 region. That's why euro started coming down," said Pramod Patil, a senior foreign exchange dealer at State Bank of Mauritius.
The euro fell versus the dollar on Monday, coming off a six-week high as uncertainty over whether euro zone leaders would agree a comprehensive plan to tackle the debt crisis this week prompted investors to take profit on its earlier rally.
The benchmark 30-share BSE index closed 0.9 percent higher, after two straight sessions of losses, as hopes for a solution to the euro zone debt crisis encouraged investors, and helped them shrug off the possibility of an interest rate increase by the central bank.
"Policy review by the Reserve Bank of India on Tuesday and then the European Summit on Wednesday can have significant impact on the market direction in the near term," a dealer with a state-run bank said.
The Reserve Bank of India is widely expected to effect a 13th rate increase since mid-March 2010.
"The month-end dollar demand from oil companies also resulted in the rupee reversing earlier gains," Patil said.
Oil is India's biggest import item and domestic oil refiners are the largest purchasers of dollars in local currency market.
The local currency has lost more than 10 percent of its value against the dollar this year and is the worst performer among major Asian peers.
The depreciation of the rupee emerges as a new source of price pressures, the central bank said in the macroeconomic report released on Monday.
"Rupee depreciation makes RBI's fight against inflation difficult and hence the central bank might stem the rupee's fall beyond 50.00 per dollar for sometime ," Hari Chandramgathan, a senior foreign exchange dealer with Federal Bank, said.
Indian markets will be closed for a religious holiday on Wednesday and Thursday.
The one-month onshore forward premium on the rupee was at 25.25 points from 26.50 on Friday, the three-month premium was steady at 64.5 points and the one-year premium was at 150 points, from 143.5.
The one-month offshore non-deliverable forward contracts were quoted at 49.82, steady versus the spot rupee rate.
In the currency futures market , the most traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange were all at 49.86. The total traded volume on the three exchanges was $5.5 billion.
Copyright Reuters, 2011