Headline inflation shot to a six-month high in August, driven by a 245 percent annual jump in onion prices, data earlier in the day showed, pulling the rupee off the day's highs.
Inflation rising at a time when growth in Asia's third largest economy is languishing at a decade low would complicate policy making for the central bank, already struggling to boost the rupee.
After hitting a series of record lows in August, the rupee has stabilised since Raghuram Rajan, the new central bank governor, assumed office on Sept. 4 and announced a series of measures to boost the currency.
The rupee has since gained 7.6 percent, hitting a near one-month high of 62.45 per dollar in early trade.
Traders, however, said Monday's rally was only a knee-jerk reaction and markets would again start focusing on the domestic fundamentals soon, which would keep trade choppy heading into the central bank's monetary policy decision on Friday.
Prior to that, the Federal Reserve will announce its much awaited move on tapering monetary stimulus after its two-day meeting on Sept 17-18.
"The RRR (Raghuram Rajan) effect has so far been working with geo political factors supporting," said Paresh Nayar, head of fixed income and currencies at First Rand Bank.
"INR has gained remarkably and with new measurements announced yet to get implemented, there could be good accrual to reserves through FCNR-B and bank borrowings. But FOMC announcement
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