The rupee quoted at 86.3675 to the U.S. dollar at 11:24 am IST, down from 86.2050 on Friday. The local currency had managed a 0.5% recovery last week, hitting the highest in two weeks, on relief in the emerging market currency space over U.S. tariffs after U.S. President Donald Trump did not immediately levy tariffs on its trading partners.

"Each passing day with no tariff-related announcement (for major partners) brings hope that Trump might move slowly on aggressive policies," Srinivas Puni, managing director at QuantArt Market Solutions, said.

USD/INR had managed a pullback "correlating with the dollar softness. That softness in the dollar is contingent on the Federal Reserve remaining neutral and Trump delaying aggressive action on tariffs," he said.

The further decline in Indian equities on Monday did not help the rupee. The Nifty 50 Index (.NSEI) fell about 1%. Foreign investors have taken out $7.5 billion worth of stocks from India so far this month.

The persistent equity outflows and hedging by corporate clients suggest that rallies in the rupee will be short-lived, a currency trader at a bank said.

FOCUS ON FED

The Fed this week is widely expected to make no changes to the policy rate and with no new projections on inflation and rates due at this meeting, the focus will be on Fed Chair Jerome Powell's presser.

In the press conference, we will listen for hints about whether the further decline in inflation we expect in coming months could open the door to rate cuts.. and how the Fed intends to navigate uncertainty about potential tariff increases now and their impact on prices later, Goldman Sachs said in a note.