The Indian rupee weakened on Monday, posting its biggest single-day fall in three weeks, on the back of heavy dollar buying by oil firms and other importers looking to meet month-end demand, while weak regional sentiment added to the downside.
Almost all Asian currencies weakened against the dollar while global equities saw some consolidation after recent gains as investors awaited confirmation that the financial market conditions and the outlook for the euro area have improved.
Some caution also prevailed ahead of the Reserve Bank of India policy review on Tuesday, when the central bank is widely expected to cut interest rates by 25 basis points, its first cut in the key lending rate since April 2012.
In its macro-economic report, released close to the market closing time, the central bank said a sustained commitment to contain fiscal and current account deficits was needed to create room for monetary easing.
"Month-end dollar demand from importers and the euro's losses hurt the rupee. There were good bunched up flows from Friday, but the demand was strong," said A. Ajith Kumar, a senior foreign exchange dealer with Federal Bank.
"The rupee may be rangebound between 53.55 to 53.95 until the policy outcome tomorrow. A 25 bps cut, though mostly discounted, may still sentimentally push up the rupee by 10-15 paise. If there is a 50 bps cut, we may see the rupee strengthen beyond 53.60," he added.
The partially convertible rupee closed at 53.91/92 per dollar versus its Thursday's close of 53.68/69. The unit fell 0.4 percent on the day, its biggest single-day fall since Jan. 4. Forex market was closed on Friday for a local holiday.
The rupee has been supported by strong foreign flows into domestic shares. Foreign institutional investors have bought $3 billion in the first 23 days of the month, marking a record high for that time period, according to a report on Monday from Goldman Sachs.
That has helped reduce some of the worries about India's current account deficit, although the scope of future rate cuts from the RBI, along with the government's fiscal consolidation steps, will help determine the outlook for the rupee.
In the offshore non-deliverable forwards, the one-month contract was at 54.22 while the three-month was at 54.78.
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 around 53.93 with a total traded volume of $7.75 billion.