The rupee ended at 50.28/29 to the dollar, marginally stronger from Tuesday's close of 50.36/37. Trading will be closed on Thursday for a local holiday.
"There was a big (dollar) inflow, for which a foreign bank was on the (dollar) selling side," said S. Nagarajan, head of forex dealing at Al Rostamani International Exchange.
However, Nagarajan, like most foreign currency dealers, fear the rupee could inch towards the 51-mark on heightened global risk aversion and persistent demand for dollars from local oil refiners.
The outlook for foreign inflows, which turned hazy after hopes of a revival in reforms got jolted following the Congress party's rout in crucial state elections on Tuesday, is also expected to hurt the rupee.
"Fears are the budget may disappoint on the topics of reforms and fiscal consolidation. This may lead to drying up of inflows, and a sell-off in stocks that could coincide with high oil prices," said a senior foreign currency trader with a state-run bank.
Oil is India's biggest import item and local oil companies are the largest purchasers of the greenback in the domestic currency market.
In fact, the unit's fall to a low of 50.76, a level last seen on Jan. 18 as per Thomson Reuters data, was mostly due to dollar demand from oil importers.
The government will announce on March 16 its budget for the 2012/13 financial year beginning on April 1.
The one-month offshore non-deliverable forward contracts were at 50.70.
In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange ended at 50.5325, on the MCX-SX at 50.5500 and on the United Stock Exchange at 50.5025, on a total volume of $5.6 billion.