The rupee fell 46 paise to close at 62.23 against the dollar on Friday, in line with a sharp decline in local stocks, after a surprise hike in repo rate by the RBI.
Governor Raghuram Rajan also partially eased liquidity-tightening measures that were introduced in July to curb volatility in the currency market.
Fresh dollar demand from importers and some banks put pressure on the rupee, while heavy equity investments by foreign institutions restricted the fall to some extent.
The rupee opened lower on the interbank foreign exchange market, at 62.05 a dollar from 61.77 previously, and reached a high of 61.88. After the rate hike, the local currency fell to 62.61 before recovering some ground at the fag end to close at 62.23, a drop of 46 paise or 0.74%.
Reserve Bank of India Governor Raghuram Rajan, in his maiden mid-quarter monetary policy review, unexpectedly raised the short-term lending rate to 7.5%, seeking to tame inflation. The cash reserve ratio was left unchanged.
To ease liquidity, the marginal standing facility rate, at which banks borrow from the RBI, was cut to 9.5% from 10.25% and the minimum daily maintenance of the cash reserve ratio was lowered to 95%.
"The RBI seems to be confident that further weakening to the rupee would be protected in the near term," said Raghu Kumar, cofounder of RKSV Securities. "Thus, the RBI is focusing on bringing down inflation and bringing stability to the rupee by being hawkish with its policies through monetary tightening."
The RBI's decision surprised the stock markets and the benchmark S&P BSE Sensex ended 383 points lower. Foreign institutional investors bought a net $567.27 million shares on Thursday, according to data from Sebi.
The rupee climbed 161 paise on Thursday after the US Federal Reserve decided to continue its bond-buying programme, easing fears of an immediate outflow of capital from emerging markets, including India.
The dollar index, a barometer of six rivals, was flat after the Fed's decision.
"RBI has intervened from 62.58 levels, which capped the rupee fall," said Pramit Brahmbhatt, CEO of Alpari Financial Services (India). "The trading range for the spot $-Rs pair is expected to be within 62 to 62.80."
Forward dollar premiums continued to rule weak on sustained receipts by exporters.
The benchmark six-month forward dollar premium payable in February declined to 232-235 paise from Thursday's close of 236-241 paise and far-forward contracts maturing in August moved down to 433-438 paise from 437-442 paise.
The RBI fixed the reference rate for the dollar at 62.2430 and for the euro at 84.2295.
The rupee fell to 99.76 against the pound from 99.36 previously and closed at 84.26 per euro from 83.70. It was down against the Japanese yen at 62.62 per 100 yen from 62.48.