The Indian rupee posted its biggest one-day decline in more than three months on Tuesday as the relief rally fuelled by the euro zone rescue package faded, with the dollar's gains against major currencies also weighing sentiment.
The partially convertible rupee <INR=IN> closed at 45.30/31 per dollar, 1 percent weaker than its 44.8450/8550 close on Monday, when it hit a high of 44.82.
The rupee's drop is the biggest since its 1.04 percent fall in early February.
"There was good dollar demand from foreign banks today on behalf of customers looking to hedge their investments in Indian debt," the chief forex trader at a private bank said.
The index of the dollar <.DXY> against six major currencies was up 0.7 percent, weighing on the rupee.
The euro fell on Tuesday as the relief rally unleashed by an emergency aid package to prevent the spread of a euro zone debt crisis dissipated and the focus switched back to structural problems plaguing the bloc. [USD/]
Madhusudan Somani, head of forex trading at Yes Bank said there was good dollar demand from various corporates as well, which weighed on the rupee.
"The dollar-rupee is looking likely to edge slightly higher from current levels, we could go up to 45.60 to 45.70-75 type of levels and then it will depend on how global risk aversion and other things pan out," he said.
Indian shares <.BSESN> shed 1.1 percent as investor euphoria waned over a $1 trillion package to salvage the euro zone debt crisis that had helped the market rally the most in nearly 10 months in the previous session. [.BO]
The stock market is watched for cues on capital flows. So far in 2010, foreigners have bought a net $5.8 billion worth of shares, adding to inflows of a record $17.5 billion last year.
Dealers said there was good demand from oil importers around 44.90-44.95 in early trade, which weighed on the rupee. Oil <CLc1> is India's biggest import and refiners are the biggest buyers of dollars from the local currency market.
One-month offshore non-deliverable forward contracts <PNDF> were at 45.40, 0.2 percent weaker than the onshore spot rate, suggesting a reversal in the outlook for the rupee. The offshore rate had been at par with the spot rate in the previous session.
In the currency futures market <INRFUTURES>, the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX closed at 45.3525 and 45.3575 respectively, with the total traded volume on the two exchanges at about $9.4 billion.