On Monday, the local unit had settled at Rs 71.07 vs against the greenback.

The rupee dropped 20 paise to close at 71.07 against the dollar on Tuesday as heavy selling in domestic equities, unabated foreign fund outflows kept investors edgy. Forex traders said market sentiment remained fragile ahead of US-China trade meet on October 10. Besides, rising crude oil prices also put pressure on the domestic unit.

At the interbank foreign exchange market, the local currency opened on a strong note at 70.75 and but during the day it lost ground and fell to a low of 71.16. It finally settled at 71.07, lower by 20 paise against its previous close. On Monday, the local unit had settled at Rs 71.07 vs against the greenback.

"The weakness in rupee continues for the second day in trot following lower domestic equity markets. Foreign fund outflows and higher dollar weighed on rupee against dollar," said V K Sharma, head - PCG & Capital Market Strategy, HDFC securities.

The dollar index, which gauges the greenback's strength against a basket of six currencies, rose by 0.11 per cent to 99.48. Heavy selling in domestic equity markets and sustained foreign fund outflows weighed on the domestic currency, forex traders said.

The 30-share BSE Sensex, which opened on a firm footing, crashed over 737 points in late afternoon trade, before finally recouping some losses to finish at 38,305.41, down 361.92 points or 0.94 per cent. The broader Nifty too underwent bouts of volatility and closed lower by 114.55 points, or 1 per cent, at 11,359.90.

Foreign institutional investors (FIIs) offloaded shares worth a net Rs 1,298.56 crore on Tuesday, according to provisional exchange data.

"Indian rupee opened higher as government sent strong signals that it will try and meet the fiscal deficit target after sticking to the borrowing plan for H2. However, as expected rupee was unable to sustain the gains tracking the sharp rally in dollar index," said Rahul Gupta, Currency Research Head, Emkay Global Financial Services.

Mr Gupta further noted that this week's focus is the RBI policy and ahead of that we expect USD/INR to trade in 70.80-71.50 range with a positive bias.

Brent futures, the global oil benchmark, soared 1.08 per cent to $59.89 per barrel.