Suspected dollar sales by the Reserve Bank of India helped the rupee recover all intraday losses on Friday but the currency still posted its biggest weekly fall in nine weeks.
The likely intervention triggered a wave of long-dollar position liquidation, traders said.
The rupee ended at 49.40/41 to the dollar after hitting a low of 49.76, a level not seen since January 30, according to Thomson Reuters data. The central bank likely sold dollars around this level, traders said.
The rupee closed at 49.4975/5075 on Thursday.
For the week, the currency lost 1.45 per cent, its biggest single-week drop since the week ended December 11. It was also the rupee's first weekly decline in six weeks.
It is expected to remain under pressure, traders said.
"There is strong bidding interest (for dollars) from importers and payments related to external commercial borrowing of companies," said Vikas Chittiprolu, a senior foreign exchange trader at Andhra Bank. "We could see the rupee touching 50.10 next week."
Analysts estimate that two dozen Indian companies have $5.8 billion in outstanding foreign currency convertible bonds that mature in 2012.
"No matter how strong the inflows, it is not going to be enough to match the demand," said a senior foreign exchange trader at a private-sector bank. "I won't be surprised if some more rupee selling comes in."
The weak fundamentals of Asia's third largest economy may again prove to be Achilles heel of the currency, which has risen more than 7 per cent so far in 2012 on back of more than $7 billion of foreign inflows.
Data on Friday showed industrial production grew at a sharply slower pace of 1.8 per cent in December, the weakest performance since mid-2009 based on a 3-month moving average.
One-month offshore non-deliverable forward contracts were at 49.79.
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 ended around 49.60, on a total volume of $5.26 billion.