Rupee weakens on Fed letdown; ECB in focus

The rupee weakened on Thursday in quiet trading after the Federal Reserve refrained from new U.S. monetary stimulus, denting hopes for gains in global risk assets.

The focus shifted to the European Central meeting later in the day. President Mario Draghi boosted investor hopes last week by pledging to do everything necessary to preserve the euro, and any signs he overplayed his hands could lead to widespread disappointment.

In India, investors await fiscal reforms from the government after pro-market P. Chidambaram took over as the finance minister earlier this week.

However, expectations are being kept in check, especially after the weather office announced rains during the monsoon season remained below average, leading to worries about food inflation and about the impact on rural consumption.

"I think markets have a fair bit of hope pinned on Chidambaram," said Rajeev Mahrotri, head of trading at IndusInd Bank.

"But monsoons and fiscal overshoot are beyond him. They will hurt the economy a fair bit, and add to that Europe and a slowing U.S., and things don't look pretty. I expect INR to underperform.," he added.

The partially convertible rupee closed at 55.84/85 per dollar, weaker than its Wednesday's close 55.47/48.

Traders cited low volumes ahead of the ECB meeting, as they spent the session mainly tracking the euro movements.

ECB action would come after the Fed stopped short of action on Wednesday, though it signaled more strongly that further bond buying could be in store.

The BSE Sensex fell 0.2 percent.

The one-month offshore non-deliverable forward contracts were at 56.19 while the three-month were at 56.88.

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 56.1150 with a total traded volume of $2.9 billion.