The Indian rupee fell on Friday tracking losses in local shares, which raised worries of foreign investors continuing to pull out funds from Asia's third-largest economy, and weighed by mild gains in the dollar overseas.
At 10:55 a.m. (0525 GMT), the partially convertible rupee was at 45.30/31 per dollar, 0.15 percent weaker than its 45.24/25 close on Thursday, when it rose as much as 45.04, its strongest since Jan. 4.
"Rupee has weakened due to stocks fall and inflation worries. Rupee is likely to be under pressure if inflation keeps coming higher," said Rohan Naik, head of foreign exchange trading at Standard Chartered Bank in Mumbai.
The 30-share benchmark index was down 0.5 percent, with financials leading the fall ahead of inflation data. The wholesale price index in December probably rose 8.35 percent from a year earlier, accelerating from November's 12-month low of 7.48 percent, median forecasts in a Reuters poll this week showed.
Foreign institutional investors (FIIs) are net sellers of $520-million worth of shares this year until Wednesday, pushing the rupee down 1.3 percent. In 2010, record inflows of $29.3 billion had helped the rupee gain 4.1 percent.
"There is demand from oil firms weighing on the rupee and may be seeing equities crashing and FII flows drying out. People have started buying the dollar," said Hari Chandramgathan, a senior foreign exchange dealer with Federal Bank . "There has been some defence-related dollar buying in the market as well in the past few days. Today, I expect a range of 45.15-45.40," he added.
Oil is India's biggest import and refiners are the largest buyers of dollars in the local currency market. But, traders expect some dollar inflows for investments in government and corporate debt, which is seen limiting any sharp fall in the rupee.
Foreign institutional limits in government and corporate debt were increased by $5 billion each to $10 billion and $20 billion. The limits were allotted in December and will expire on Jan 15. Traders said mild gains in the dollar versus majors also weighed on sentiment.
The euro succumbed to light profit-taking on Friday, a day after staging its biggest surge in six months on solid debt sales by Spain and tough talk on inflation by the chief of the European Central Bank.
The index of the dollaragainst six major currencies was marginally higher at 79.200 points. One-month offshore non-deliverable forward contracts were quoted at 45.58, weaker than the onshore spot rate.
In the currency futures market, the most traded near-month dollar-rupee contracts on the National Stock Exchange, MCX-SX and United Stock Exchange were at 45.3975, 45.40 and 45.3950 respectively, with the total traded volume on the three exchanges at about $1.5 billion.