The Indian rupee rose on Friday, but gains were capped due to dollar demand amid a slump in the greenback after U.S. data overnight reaffirmed expectations of a slowdown in the pace of rate hikes by the Federal Reserve.

The rupee edged up 0.05% to 81.1725 per dollar by 10:22 a.m. IST, and was headed towards weekly gains of 0.7%.

Oil importers sought dollars, while there was also fixing-related dollar demand by foreign banks, which likely weighed on the rupee, said a trader with a private bank.

The overall tone of the markets was quite subdued, with most Asian currencies gaining marginally and stocks declining across the board ahead of U.S. non-farm payrolls data, another big test for investors looking for signs of a shift in the Fed's monetary policy.

Indian equities shed 0.5%, set for their first drop in nine sessions.

The dollar index nursed heavy losses, having declined 1.2% overnight after the Fed's preferred inflation measure, core personal consumption expenditures (PCE) price index, softened in October.

U.S. manufacturing activity contracted for the first time in 2-1/2 years, with both datasets adding to the prospect that the Fed could opt for a 50 basis point (bps) rate hike at its next policy meeting in two weeks.

Fed Chair Jerome Powell had already signalled earlier this week that the U.S. central bank could slow its pace of rate hikes by as soon as this month.

Meanwhile, in China, sources told Reuters that Beijing is set to announce an easing of its COVID-19 quarantine rules in the coming days and a reduction in mass testing.

This was a marked shift in policy after anger over the world's toughest curbs fuelled widespread protests that fuelled worries about the country's growth and its trickle-down effect on the global economy. (Reporting by Anushka Trivedi in Mumbai; Editing by Savio D'Souza)