The rupee posted its biggest single-day fall in four months on Friday, as the dollar's strength against global currencies and demand from oil and gold importers offset gains in domestic shares that have been driven by strong foreign flows.
The drop led the currency to post its biggest weekly fall in six months.
The yen slid to a four-year low against the dollar on Friday after better U.S. data sparked talk the Federal Reserve may scale back monetary easing and signs emerged that Japanese investors were buying more foreign assets.
Dealers said there was also good demand seen for the greenback from corporates, particularly commodities-based sectors like gold and oil.
"I expect gold demand from banks to peak in the coming days as banks will import more gold before the restriction on their import of gold becomes effective," said Pramod Patil, assistant vice-president, forex and money markets at United Overseas Bank.
The Reserve Bank of India (RBI) said in February it would consider restricting gold imports by banks in extreme circumstances and repeated this in its policy statement last week.
"The immediate resistance for USD/INR is 54.75, followed by psychological resistance of 55.00 and good support around 54.15-20," Patil added.
The partially convertible rupee closed at 54.80/81 per dollar, 1 percent below its 54.25/26 close on Thursday. The unit dropped to as much as 54.8050 during the session, its weakest since April 8.
The unit dropped 1.6 percent on the week in its biggest weekly fall since November 11, 2012.
Traders added the rupee was also hurt by significant short-covering in the offshore rupee non-deliverable forwards market with the one-month contract trading around 55.04 and the three-month at 55.55.
Investors are now looking ahead at inflation indicators, with the consumer price inflation due on Monday and wholesale price inflation out on Tuesday.
WPI is expected to have risen 5.5 percent on year in April, a Reuters poll showed, marking the slowest pace since November 2009. Core WPI is expected to have risen 3.5 percent.
Traders say the WPI data will be crucial in setting expectations about the future course of monetary policy action, although very aggressive rate cuts are not expected.
Traders also expect continued buying of Indian debt and stocks by foreigners, which is expected to boost the rupee.
The rupee is seen holding in a broad 54 to 55 range next week with the dollar's moves versus global currencies also key for direction.
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 54.97 with a total traded volume of $6.6 billion.