The Indian rupee recovered to close higher for a third straight session on Monday, helped by dollar inflows which had bunched up over the weekend and a stock market rally which could attracted more foreign investors.
But concerns about steep prices of oil, India's largest import, high inflation and a global dollar bounce were rife.
The rupee closed at 45.8500/8550 per dollar, off an early low of 45.94 and above Friday's 45.8900/9000. It has stretched its gains over the past three days to 0.55 percent.
"Inflows were much more than demand today, but I don't expect the rupee to retain this firm trend," said a trader at a state-run bank. "Oil prices and the widening trade deficit are a worry. Inflation will also keep the rupee weak."
Traders said foreign fund investment could have flowed in on Monday, with the key stock market index rallying by 1.6 percent.
Financial markets anticipate robust corporate earnings announcements over the month, with the industry and services sectors expected to have witnessed strong growth.
Foreign funds invested a net $600 million in Indian shares over September.
But pricey oil, high inflation, and India's widening trade deficit are set to check the rupee's rise.
Traders expect the rupee to face resistance when it approaches the 45.80 per dollar mark, as importers and traders snap up dollars.
The Indian unit is estimated to be overpriced because the inflation rate is hovering close to eight percent, and inflation erodes a currency's purchasing power.
J.P. Morgan estimates the rupee is overvalued by 2.65 percent.