The rupee weakened to its lowest level in three weeks on Thursday as large dollar demand from oil firms late in the session weighed but gains in the domestic share market prevented a much steeper fall.
Traders said oil firms, the largest buyers of dollars in the domestic currency market, stepped up purchases hurting the local unit as oil prices held on to gains.
Oil held above $113 a barrel as Chinese economic data signalled stabilisation in the economy of the world's second-largest oil consumer while concern over supplies in the Middle East provided support.
"There was good buying from oil companies. Some stop-losses were also triggered around 53.20 levels, so tomorrow we may see the pair rising to 53.60," said Hari Chandramgathan, a senior forex dealer with Federal Bank.
"Broadly, I am expecting a 53.10 to 53.60 range tomorrow," he said, adding there was also some buying seen from gold and defence firms which may continue on Friday.
The partially convertible rupee closed weaker at 53.41/42 per dollar versus its previous close of 52.87/88. The unit dropped as low as 53.43 during the session, its weakest since September 27.
Traders said dollar selling by custodian banks looking to invest in shares seen during the day had helped match the dollar demand from oil firms, but post the stock market close, oil demand pushed the rupee lower.
The BSE Sensex rose as auto makers and property developers gained on hopes of increased sales of big-ticket items during the looming festival season, while lenders rose on hopes of higher retail loan demand.
Traders expect the rupee to broadly move in a 52.50 to 54.00 band until the Reserve Bank of India's policy review on October 30 with views split on whether or not the central bank chooses to cut rates. A rate cut will however boost the rupee in the short-term as equities would rally.
In the offshore non-deliverable forwards market, the one-month contract was at 53.66 while the three-month was at 54.17.
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 53.42 with a total traded volume of around $5.6 billion.