The rupee posted its biggest single-day loss in a month, hurt by data showing a widening trade deficit and a slump in local shares as part of a global market sell-off, but intervention from the central bank prevented steeper losses.
The local unit fell nearly 0.72% on Thursday and was the worst performer among Asian currencies as trading resumed after a holiday on Wednesday for state elections.
Worries that foreign investors would reduce their exposure are starting to weigh on sentiment, after strong buying in shares and debt had helped support the rupee so far this year.
The Reserve Bank of India (RBI) had been active in the market for most of the day, but stepped up intervention as the rupee threatened to breach the 62-mark, traders said.
"The rupee is playing catch-up with other Asian currencies as it was outperforming them some days ago," said Anindya Banerjee, currency analyst at Kotak Securities in Mumbai.
"When they have catching up to do, the rupee and stocks traditionally overdo it," he added, pointing out that the rupee and shares would continue to be under pressure in the coming sessions.
The partially convertible rupee closed at 61.8350/8450 per dollar compared with 61.41/42 on Tuesday, after touching 61.93 in intra-day trade. The fall was the biggest since Sept. 15.
The rupee was hurt after data on Tuesday showed India's trade deficit widened to $14.25 billion in September from $10.84 billion in August due to a jump in oil and gold imports.
Meanwhile, the BSE Sensex and the Nifty and fell more than 1% after foreign institutional investors sold a net $113 million on Tuesday, marking their third consecutive session of sales and raising fears they were turning more cautious about emerging markets.
In the offshore non-deliverable forwards, the one-month contract was at 62.22/32 while the three-month was at 62.84/94.