Falling for the fourth day in a row, the rupee lost a hefty 50 paise to close at 55.92 on persistent dollar demand, especially from corporates and oil importers.
The local currency touched a one-week low of 56.07 intra-day but there was no sign of RBI intervention to shore it up.
With the dollar strengthening against rivals, including the Euro, in the overseas market following disappointing US jobs growth figures, the rupee was under pressure throughout the session as foreign banks and importers bought the US currency.
After opening sharply lower at 55.90 against last weekend's level of 55.42 at the Interbank Foreign Exchange market, rupee slumped day;s low level soon.
The currency had last fallen below the 56-level against the dollar on June 29.
With foreign institutional investors pumping over Rs 250 crore (Rs 2.5 billion) in stocks on Monday as per provisional Bombay Stock Exchange data, helped rupee recover a little and strengthen to 55.81.
But weakness emerged again at closing as the rupee ended at 55.92. In the last four days, the rupee has tumbled by 154 paise or 2.83 per cent.
"The weakness in rupee was purely due to the external situation, especially the slide in the Euro against the dollar.
"There was also demand from the oil companies which put a pressure," said N S Venkatesh, Treasury head, IDBI Bank.
In Hong Kong market, the euro traded close to two-year lows against the dollar in Asian trading today amid worries about Europe's outlook ahead of a key meeting of Eurozone finance ministers later in the day.
"Selling by corporates also led to rupee's fall today but there was no intervention by RBI in the market," said Hemal Doshi, Currency Strategist, Geojit Comtrade.
With the rupee continuing to being volatile, 40 per cent of respondents in a survey of corporates by Standard Chartered felt it will slide below 57
Meanwhile, the Indian stock market barometer Sensex on Monday dropped by 129 points to end at 17,391.98 -- its lowest closing in over a week.
According to experts, global investors remain wary of risky assets, including stocks and emerging market currencies, and are attracted towards the US dollar after a spate of sluggish economic data signalled a slowing global economy.
"The dollar index is seen gaining strength in the last few days and it is currently trading above 83 levels.
"We expect the dollar to continue its bullish trend. . .as sentiments get clouded with risk aversion across the globe," said Abhishek Goenka, Founder & CEO, India Forex Advisors.
Venkatesh of IDBI Bank feels in the short term, the market will be looking at the outcome from Eurozone meeting. ". . .the possibility of a third round of quantitative easing in US, whether it comes before the November elections at all. . . will also be watched," he said.
The premium for the forward dollar improved further on sustained paying pressure from banks and corporates.
The benchmark six-month forward dollar premium payable in December moved up further to 174-176 paise from last Friday's level of 169-171 paise.
The premium for far-forward contracts maturing in June also shot up to 317-319 paise from 304-306 paise previously.
The RBI fixed the reference rate for the US dollar at 56.0215 and for euro at 68.8275.
The rupee declined further against the pound sterling to 86.63 from last weekend's level of 86.08.
The local currency also dropped further against the Japanese yen to 70.31 per 100 yen from 69.41 previously.
However, rupee fell back against the euro to 68.79 from its last close of 68.58.
