The Indian rupee fell for the first session in three on Friday, tracking losses in local shares and weighed down by oil importers' dollar demand, ending a volatile week largely flat.
Dollar sales by exporters and some inflows towards the government's 5.8 percent stake sale in Steel Authority of India Ltd prevented a sharper fall in the local unit on Friday.
The outlook for the rupee weakened after a key regional ally withdrew from the ruling coalition, raising doubts about the government's reform agenda and after the Reserve Bank of India's cautious statement on monetary policy raised concerns over economic growth.
Investors will closely track developments as Cyprus races against time to find a solution to its funding crisis and expect the rupee to trade range-bond next week when markets will be closed for two days on account of public holidays.
"I don't expect very sharp movements next week unless something drastic happens in Europe. Developments in Europe will be a main cue" said Uday Bhatt, a foreign exchange dealer with UCO Bank.
Bhatt expects the rupee to trade in a 54.20 to 54.80 range against the dollar.
The partially convertible rupee closed at 54.33/34 per dollar versus 54.275/285 on Thursday. It traded in a 54.26 to 54.41 band in the session.
Indian shares fell for a sixth consecutive session to their lowest close in four months as blue chips continued to reel from concerns about political instability and doubts about the prospect of future rate cuts.
Trading is expected to be subdued next week. A foreign exchange dealer with a foreign bank said exporters selling dollars is likely to balance demand from oil importers, preventing sharp volatility in the rupee.
In the offshore non-deliverable forwards, the one-month contract was at 54.80 while the three-month was at 55.43.
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 closed at around 54.36 with a total traded volume of $4.9 billion.