The Indian rupee fell to a one-week low on Monday and posted its biggest single-day fall in three months, as custodian banks bought dollars on the back of sharp losses in local shares, while global risk assets weakened on global economy concerns.
The euro fell on risk aversion ahead of global earnings results and after the World Bank cut its growth forecasts for the East Asia and Pacific region, reversing the gains seen after the stronger-than-expected U.S. jobs data on Friday.
India's main share index fell 1.2 percent, as profit-taking, coupled with business outlook concerns, hit recent outperformers.
However, foreign funds continue to remain buyers of a net $16.5 billion worth of Indian equities in 2012 and analysts expect capital inflows to continue on the back of global monetary stimulus measures.
"The USD/INR was being driven mainly by the movement in the euro and local equities today. Such intermittent upticks will always be there, but the direction for the pair is clearly lower," said Ashtosh Raina, head of forex trading at HDFC Bank.
"I expect the rupee rally to continue after some mild consolidation. It may touch 51 levels by end-December. This week the pair may hold between 52.00 and 53.00 levels," Raina said.
The partially convertible rupee closed at 52.64/65 per dollar, after hitting 52.65, its lowest level since Oct. 1.
It closed down 1.5 percent on the day, its biggest single-day fall since June 22.
Custodian banks, which handle foreign investor accounts, were seen buying dollars, which dealers attributed to the sharp falls in domestic equity markets on Monday.
Traders are now focusing on the Reserve Bank of India's policy review at the end of the month, after a slew of government fiscal and economic reforms has sparked hopes for potential interest rate cuts.
India's economic slowdown has bottomed out, but a full recovery requires tough decisions, Finance Minister P. Chidambaram said on Monday, signalling his intent to push through unpopular reforms in comments that were seen re-enforcing his previous stance.
Traders said the sharp fall in the rupee, triggered sudden import covering in near-end forwards.
The USD/INR one-month forward premium rose sharply to a high of 38.50 points versus its previous close of 32.25, as importers rushed to book their short-term payables.
The three-month forward rate steadied at 92, while the one-year rate rose marginally to 314 versus previous close of 311.50.
In the offshore non-deliverable forwards market, the one-month contract was around 52.99 while three-month was at 53.46.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 52.75 with a total traded volume of around $3.5 billion.