The rupee fell on Wednesday, snapping a three-session winning streak, led by dollar demand from oil refiners and a late fall in the euro.
Global risk sentiment fell after German data showed imports and exports falling and Bank of England Governor Mervyn King said there was enormous uncertainty about the euro.
The Sensex also reflected the global sentiment. The benchmark index gave up gains to end flat at 17,600.56 after rising as much as 0.7 percent during the session.
The rupee saw decent two-way interest in the session, with the unit trading in a 54.9550-55.43 band to the dollar.
Dollar demand from oil refiners continued into the session, while inflows kept a lid on the rupee's losses.
Dealers said that while the rupee will continue to track the euro, the market is also looking at some action from the government as well as the June factory data due Thursday to get a health-check on the economy.
India's industrial output grew at a slower pace in June, hobbled by weak investment at home because of policy inaction and a drop in export orders from the United States and Europe, a Reuters polls showed on Tuesday.
A raft of brokerages and banks have cut India's growth forecasts for the current fiscal year. CLSA and Citigroup forecast the economy to grow about 5.5 percent, way below the cental bank's downward revised estimate of 6.5 percent.
"So far, rallies in the rupee have been short-lived. We expect this to continue till tangible progress is made on resolving India's 'triple deficit' problem i.e. trade, fiscal and policy deficits," said Rajesh Cheruvu, chief investment officer for RBS Private Banking in India.
The partially convertible rupee closed at 55.42/43 per dollar as per the SBI closing rate versus its previous close of 55.0650/0750.
The one-month offshore non-deliverable forward contracts were at 55.68, while the three-month was at 56.36.
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 55.44 with the total traded volume at around $5 billion.