The Indian rupee gave up early gains to end lower on Tuesday, driven by a late fall in the euro, with concerns over the country's current account deficit expected to remain a major drag for the currency.
The government's top economic adviser, Raghuram Rajan, named the record-high current account deficit as the main worry for the country, reiterating the stance from Finance Minister Palaniappan Chidambaram in his budget speech last week.
The Reserve Bank of India has also named the current account deficit as a factor in its policy decisions, adding to these concerns.
"The short-term view is USD/INR should consolidate in the 54.30-55.00 area for an upmove towards 56.00 and higher by the end of March 2013," said Ashis Barua, a senior forex dealer at IndusInd Bank, citing the current account gap as a key reason for his view.
The partially convertible rupee closed at 54.92/93 per dollar versus its previous close of 54.86/87 on Monday. The unit had touched an intraday high of 54.61, primarily driven by sharp gains in stocks.
Indian shares posted their biggest daily gains in three months as global investors bet major central banks will keep monetary policy loose at meetings this week. The rupee was also helped by the euro which rose versus the dollar in early trade, helped by slightly better-than-expected euro zone data.
The failure of USD/INR to break its 55-55.15 resistance zone also helped expectations the rupee could see some support in the near term.
However, a late fall in the euro on reported selling by a macro fund and oil-related USD demand wiped out the rupee's early gains.
Concerns about the current account deficit are also expected to linger, although some investors expect the RBI will still cut interest rates later this month given the sharp slowdown in growth and the government's commitment to meet its fiscal deficit targets.
In the offshore non-deliverable forwards, the one-month contract was at 55.35 and the three-month was at 55.97.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the National Stock Exchange all closed at 55.15 with a total traded volume of $4.9 billion.