The rupee depreciated 3 paise to settle at 83.23 (provisional) against the US dollar on Wednesday, as a muted trend in domestic equities and sustained foreign fund outflows weighed on investor sentiments.

Forex traders said the strength of the American currency in the overseas market further dented investor sentiments.

At the interbank foreign exchange market, the local unit opened at 83.22 against the US dollar and moved in a range of 83.27 to 83.19.

The rupee finally settled at 83.23 (provisional) against the US dollar, down 3 paise from its previous close.

On Tuesday, the rupee had settled at 83.20 against the dollar.

"The Indian rupee declined on weak domestic markets and further selling by FIIs. However, softening of US dollar cushioned the downside," said Anuj Choudhary - Research Analyst at Sharekhan by BNP Paribas.

Choudhary further said that the US dollar eased from a near 11-month high as investors are likely to narrow their positions ahead of US non-farm payrolls data later this week.

"We expect the rupee to trade with a negative bias amid risk aversion in global markets and a hawkish tone of most Federal Reserve officials," Choudhary said.

However, softening of crude oil prices may cushion the downside.

"Any intervention by the RBI may also support rupee at lower levels. Traders may take cues from Services PMI, ADP non-farm employment and factory orders from the US," he said.

Market participants may remain cautious ahead of the Reserve Bank's monetary policy decision later this week.

The RBI governor-headed six-member Monetary Policy Committee (MPC) started its three-day meeting on Wednesday. Governor Skhatikanta Das will announce the decision on Friday (October 6).

Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, fell by 0.21 per cent to 106.77.

Brent crude futures, the global oil benchmark, declined 0.95 per cent to $90.06 per barrel.

On the domestic equity market front, the 30-share BSE Sensex closed 286.06 points or 0.44 per cent lower at 65,226.04. The broader NSE Nifty declined 92.65 points or 0.47 per cent to 19,436.10.

Foreign Institutional Investors (FIIs) were net sellers in the capital markets on Tuesday as they offloaded shares worth ₹2,034.14 crore, according to exchange data.