The Indian rupee fell on Thursday, dragged by a late fall in the euro, giving up gains accrued after data showed core inflation eased and the central bank governor was seen by investors as endorsing the government's 2013/14 budget.
The euro fell to a three-month low against a broadly buoyant dollar as economic and political concerns in the euro zone contrasted a string of positive data from the United States.
Earlier, Reserve Bank of India chief's comments on the budget and a drop in core inflation raised hopes that the central bank will cut interest rates next week.
The currency made gains after non-food manufacturing inflation, which the central bank uses to gauge demand-driven price pressures, slowed to 3.8 percent in February, the weakest pace since March 2010.
That helped offset initial concerns after data showed headline inflation had risen more than expected.
Sentiment improved after RBI Governor Duvvuri Subbarao, speaking in London on Wednesday, called the federal budget "responsible," a comment that buoyed markets given that the central bank had expressed concerns about fiscal deficit earlier.
"USD/INR sold off after the inflation data. The market took solace from lower core inflation number," said Hari Chandramgethen, head of forex trading at South Indian Bank.
The partially convertible rupee closed at 54.355/365 per dollar versus its previous close of 54.30/31. The local unit traded in a 54.17-54.5325 band in the session.
The rupee was also helped by gains in Indian shares, with the benchmark BSE index ending up 1.1 percent on the inflation data.
With the inflation data out, the focus will shift to the RBI's policy review on March 19. A rate cut, the central bank's second easing this year, would help improve confidence about economic growth, potentially sparking gains in the rupee.
In the offshore non-deliverable forwards, the one-month contract was at 54.77, while the three-month was at 55.38.
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 54.53 with a total traded volume of $6.2 billion.