The rupee fell on Tuesday with traders awaiting the outcome of the Reserve Bank of India's policy review as well as the Federal Reserve's decision on tapering monetary stimulus.
The RBI is widely expected to raise its key repo rate by 25 basis points to 8.00 per cent on Wednesday, its third such hike in four months after recent data showed both wholesale and retail inflation at multi-month highs.
While higher yields from a rate hike can make a local currency more attractive, in India's case, it could hit shares and raise concerns about the impact on an economy growing below the decade-low of 5 percent in the previous fiscal year.
Fund flows into equities, which totalled $18.9 billion so far in 2013, have been supportive of the rupee, despite $8.2 billion outflows in debt.
"A 25-basis-point rate hike is largely priced in. What will be more important to the rupee's
fortunes is the decision on quantitative easing. If there is some reduction in stimulus, we may see a selloff in the rupee, though it may not be as violent as last time," said Abhishek Goenka, chief executive at India Forex Advisors.
The partially convertible rupee closed at 62.01/02 per dollar compared with 61.73/74 on Monday, a fourth day of losses out of five.
The domestic rate decision will be followed by the Federal Reserve's decision on when to begin tapering its extraordinary bond buying programme.
India is believed to be better placed to face such tapering after adding $34 billion to forex reserves via the RBI's two concessional swap facilities and shrinking its current account gap by bringing down gold imports.
Dealers attributed part of rupee's losses on Tuesday to outflows of foreign money which did not get allocation in the Power Grid Corp of India share sale.
In the offshore non-deliverable forwards, the one-month contract was at 62.36 while the three-month was at 63.16.
The rupee fell on Tuesday with traders awaiting the outcome of the Reserve Bank of India's policy review as well as the Federal Reserve's decision on tapering monetary stimulus.