The rupee weakened for a second session on Tuesday as the dollar rallied broadly on hopes US lawmakers would agree on a deal to raise the country's debt limit, averting an immediate default.
The plan being negotiated by US Senate leaders would end a partial government shutdown and raise the debt ceiling by enough to cover the nation's borrowing needs at least through mid-February 2014, a source familiar with the negotiations told Reuters.
The index of the dollar against six major currencies rose to a one-month high of 80.678, pushing the rupee to session lows in the last hour of trade.
"The market is not positioned big yet for the 17th of October.
“It is not ready for a repeat of the 2008 mayhem with more intensity," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.
"The deal will likely go through last minute but either way the rupee will weaken further. If the deal doesn't go through, the fall would be much more," he added.
The partially convertible rupee closed at 61.8350/8450 per dollar compared to 61.55/56 on Monday. It moved in a wide band of 61.25 to 61.94 range during the session.
Financial markets will remain closed on Wednesday for a religious holiday.
Traders said choppy domestic shares also provided little comfort to the rupee, while expectations the Reserve Bank of India would raise interest rates late this month also weighed after data late on Monday showed annual consumer price inflation quickened more than expected to 9.84 percent in September.
Data on Monday had showed wholesale price inflation also accelerated more than expected.
In the offshore non-deliverable forwards, the one-month contract was at 62.30 while the three-month was at 63.32.
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 61.98 with a total traded volume of $2.36 billion.