The rupee saw its steepest fall in two weeks on Tuesday as investors preferred to take profits on their long rupee positions ahead of the US Federal Reserve's two-day policy meeting outcome due to be released on Wednesday.
Although the anticipated trimming of the Fed's massive bond purchases has caused some apprehension, markets expect a much longer road to rate hikes after former Treasury secretary Lawrence Summers dropped out of the race to become its next chief.
The outcome of the Fed's meeting will be a key determinant of what the Reserve Bank of India chooses to do at its monetary policy review on Friday. With growth languishing at a decade-low and inflation remaining sticky, the new central bank governor will have a tough task at hand.
"There was profit taking seen today ahead of the FOMC but good dollar selling by custodian banks helped," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with Andhra Bank.
"I expect the Fed to taper by a maximum of $15 billion and that is already discounted by the market. I see the rupee rising to 61 to a dollar by end-September as hopes from Rajan are high," he added, predicting a range of 62.50 to 64.20 until the policy on Friday.
The partially convertible rupee closed at 63.37/38 per dollar compared with 62.83/84 on Monday. The unit dropped 0.85 per cent on the day, its biggest single-day fall in two weeks.
It moved in a wide range of 62.95 to 63.6450 during the session. Traders said despite the stock market having been choppy the dollar sales seen from custodian banks helped pull the rupee off the day's lows.
The BSE Sensex rose on Tuesday, although on its lowest volume in nearly 1-1/2 months, led by gains in technology shares that were aided by a weak rupee and attractive short-term valuations due to the recent under-performance of the sector.
Most other Asian currencies also weakened versus the dollar. In the offshore non-deliverable forwards, the one-month contract was at 64.04 while the three-month was at 65.26.
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 63.46 with a total traded volume of $2.72 billion.