The rupee fell for a sixth session in seven on Thursday as heavy dollar buying by oil refiners and gold importers continued to hurt the local unit amid another bout of risk aversion globally.
World shares retreated from 17-month highs and commodities fell on Thursday as talks to avert a U.S. fiscal crisis stalled, reigniting fears over the health of the world's largest economy.
Traders said oil firms, the largest buyers of dollars in the domestic currency market, continued to buy the greenback to meet month-end and year-end demand, especially amid slightly lower global crude prices.
"I think once the fiscal cliff issue is resolved, which may happen by year-end, the rupee is likely to move towards 53-52.50," said Samir Lodha, managing director at QuantArt Market Solutions.
"The January monetary policy will also be key. I am assuming a 25-50 bps rate cut which should help the rupee appreciate as there are likely to be inflows into the equity market and the presence of a more stable environment," he added.
The Reserve Bank of India kept interest rates on hold on Tuesday, ignoring government pressure to reduce borrowing costs, but said it was shifting its focus towards boosting a flagging economy, raising the odds of a rate cut as early as January.
Foreign investors have purchased shares worth more than $22.5 billion so far in 2012 but the rupee is down 3.2 percent so far this year.
Lodha said a lack of confidence in the Indian currency and economy has prompted foreign investors coming into the country for higher rates and returns to hedge their currency exposure, resulting in no positive impact on the local currency.
The partially convertible rupee closed at 54.8450/8550 per dollar compared with its close of 54.55/56 on Wednesday. The pair moved in a range of 54.6450 to 54.91 during the session.
Shares fell on profit-taking, led by declines in auto stocks such as Tata Motors, while Adani group stocks were also hit after gaining recently on expectations Narendra Modi would win a fourth successive term as chief minister of India's Gujarat state.
In the offshore non-deliverable forward market, the one-month contract was at 55.16 while the three-month was at 55.69.
In the currency futures market, the most-traded near-term dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange closed at around 54.9250 with a total traded volume of $4.88 billion.