Rupee drops to lowest level in over a week

The rupee fell to its lowest level in more than a week on Thursday as importers stepped up dollar buying, most likely to pay for oil and defence equipment, and as caution set in ahead of the European Central Bank's rate decision later in the day.

The rupee ended at 49.4975/5075 to the dollar, after dipping to 49.5250, a level not seen since February 1, according to Thomson Reuters data. It closed at 49.15/16 on Wednesday.

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"Dollar buying related to oil was present," said Naveen Raghuvanshi, an associate vice president of foreign exchange trading at Development Credit Bank.

"There is also a big event risk in terms of the ECB rate decision and its impact on the euro."

The euro hit two-month highs against the dollar and yen as hopes that Greece would clinch a bailout deal encouraged investors to unwind bearish positions, though trading was cautious before a euro zone policy decision due around 1245 GMT.

Some traders said the rupee may weaken further in coming days, regardless of the ECB decision, given its sharp rise in January.

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An ECB rate cut would normally weaken the euro, which is seen by rupee traders as a gauge of risk sentiment.

The weak fundamentals of Asia's third-largest economy may also come back to haunt the Indian currency, traders said.

The rupee gained more than 7 percent in January, aided primarily by robust dollar inflows.

The currency dived nearly 16 percent in 2011 and was the worst performing major Asian currency against the greenback, hitting a record low of 54.30 on December 15.

One-month offshore non-deliverable forward contracts were at 49.86.

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 ended around 49.7, on a total volume of $4.72 billion.

The BSE Sensex rebounded to close 0.7 percent higher.