The Indian rupee weakened marginally on Tuesday as a sharp sell-off in domestic shares raised concerns about foreign investor outflows at a time when the country is looking to narrow a record current account deficit.
Dollar demand from oil companies also hurt the rupee, although that was somewhat offset by selling of the greenback by foreign banks.
Foreign investors have now sold a net total of $137 million in Indian shares in the four trading sessions to Monday and a net total of $710.68 million in domestic debt over the same period, according to regulatory data.
Traders said continued geopolitical tensions in North Korea are contributing to the rising concerns in the markets.
"Foreign banks were on the dollar sell side today. There was good demand from oil in the first half and custodian banks in the second half of trade," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank.
"I expect the rupee to trade in a tight range now. I am expecting it to hold in a range of 54.35-54.95 during the week".
The partially convertible rupee closed at 54.58/59 per dollar marginally weaker compared with its Monday's close of 54.56/57.
Trading was volatile with the rupee earlier heading to a near one-week high of 54.4075.
Shares extended losses for a fifth session as foreign selling in blue chips continued on worries that companies would post lacklustre earnings and amid uncertainty over political stability.
Traders said the foreign investor selling in shares and debt were leading to dollar demand from custodian banks looking to service those outflows.
If sustained, the foreign selling could raise concerns given India posted a record current account deficit in the October-December quarter.
In the offshore non-deliverable forwards, the one-month contract was at 54.89 while the three month was at 55.53.
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 54.7550 with a total traded volume of $3.86 billion.