The rupee pulled back to 62.98 per dollar versus Monday's close of 63.10. Traders are cautious ahead of the RBI's monetary policy review due at 11 a.m. where the central bank is widely expected to hold rates steady.
RBI Governor Raghuram Rajan's outlook on the future rate trajectory and his comments on the monetary policy committee report will be keenly watched. Any hawkish outlook may lead to a stock selloff, pressuring INR, traders say.
Government bonds gained ahead of the central bank's rate review. The benchmark 10-year bond yield was last down 4 basis points at 8.73 percent.
Yields have risen 25 basis points in the last five sessions after the recommendations of the central bank's monetary panel and recent hawkish comments by RBI chief Raghuram Rajan.
The RBI is likely to keep a status quo on rates on easing inflation, but Governor Rajan's outlook on direction of rates will be keenly watched.
Rajan's view on the monetary policy committee report will also be crucial as it suggests targeting consumer price inflation, which may mean an extended period of high rates.
Bond supply will return after a two-week break with the RBI announcing a Rs 14,000 crore debt sale for Friday.
U.S. Treasuries prices fell on Monday on profit-taking from last week's safe-haven gains and as traders shrugged off weaker-than-expected data on new U.S. home sales.
(With inputs from Reuters)
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