The rupee fell to its lowest in nearly a month on Thursday as a continued slump in local stocks led to fears that foreign fund inflows may dry up in the near term.
The rupee has wiped out most of the gains it made so far this year as political instability and concerns over a widening current account deficit have been headwinds to the currency.
Indian stocks fell to an over-four-month closing low on fears that foreign funds will pull out of the country, wary over the future of reforms, given the growing political uncertainty.
The rupee's losses were accentuated as it broke a key support level, breaching the 200-daily moving average.
The partially convertible rupee closed at 54.87/88 per dollar versus 54.43/44 on Wednesday and was down 0.8 percent, recording its biggest single-day fall since March 1. Intra-day it had touched 54.8950, its lowest level since March 7.
"The obvious reading is negative as we see the USD/INR over the immediate resistance at 54.55-54.60. Our view is that the euro could base out here in the interim and give some support to the rupee," said Satyajit Kanjilal, chief executive at ForexServe.
The dollar index rose to an eight-month high on Thursday, pushed higher by gains against the yen and euro after aggressive monetary easing steps from the Bank of Japan and weak euro zone business activity data.
A Reuters poll forecast the rupee to gain around 4 percent in twelve month's time, although it will likely trade around current levels over this quarter.
In the offshore non-deliverable forwards, the one-month contract was at 55.28 while the three-month was at 55.94.
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 55.17 with a total traded volume of $4.7 billion.