The rupee was at 70.89 to the dollar, after touching 70.84, its highest since Dec. 7 and stronger than Monday's close of 71.55.

"There is no demand for dollars because of expectations of lesser number of Fed rate hikes," said a senior dealer at a state-run bank.

Most of the dollar sales were from banks, though a few exporters were also selling, dealers said.

The Fed will announce its rate decision after its two-day meeting ends on Wednesday. While the Fed is widely expected to raise rates this month, analysts are calling for two more hikes in 2019 compared with three in September on worries over a potential recession there, according to a Reuters poll.

Meanwhile, India's 10-year benchmark bond yield  also fell tracking crude prices and rupee to 7.41 percent from 7.46 percent on Monday.