I didn't understand what she was saying so I couldn't reply.
Why were you having trouble understanding what she was saying?
Her words were muffled, I couldn't make them out.
You should have just asked her to repeat herself if you couldn't understand her. That would be better than being rude by just not answering her.
Rude? I'm not being rude. You are being rude.
Well it is rude to not answer someone, however if you tell them that it was simply because you couldn't understand than that would make them feel better most likely. Either way, it is understandable that you can not really make an accurate reply if you cannot hear what is being said. My point is to simply let the other person know that instead of not saying anything at all.