The Indian rupee rose on Tuesday helped by continued inflows into local equities, but a warning from Fitch on the country's ratings again highlighted the headwinds facing the domestic currency.
Foreign funds have continued to buy into Indian equities, having invested over $1 billion already in January after pumping in $24 billion in 2012, helping shares post their best gains in three years.
But a warning from Fitch Ratings that India was still at risk of losing its investment grade rating saw the rupee giving up all gains, before recovering in late session.
"The rupee was helped by some ECB (external commercial borrowing) flows today. But I think the ratings downgrade threat and current account deficit will keep a weakening bias for the rupee," said Uday Bhatt, a forex dealer with UCO Bank.
The partially convertible rupee closed at 54.99/00 per dollar, stronger than Monday's close of 55.23/24, snapping three sessions of losses. It fell to 55.38 in session at one point, an over one-month low.
Technicals charts show that the dollar/rupee should find resistance at 55.45 which is the 76.4 percent retracement of the 55.89-54.04 move between Nov. 26 and Dec. 6.
Fitch reiterated on Tuesday its "negative" outlook on India's sovereign credit rating, citing concerns about slowing economic growth, persistent inflationary pressures and an uncertain fiscal outlook.
The warning comes after data last week showed the country's current account deficit widened to a record high in the September quarter.
Dealers are now waiting the release of crucial December inflation data on Monday to gauge whether the central bank delivers a much expected rate cut on Jan. 29. Any cut would lead to a rally in the rupee via gains in equities.
In the offshore non-deliverable forwards, the one-month contract was at 55.31 while the three-month was at 55.89.
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 55.21 with a total traded volume of $5.3 billion.