The rupee rose slightly on Friday, ending a two-day losing streak after suspected intervention by the RBI, although broader sentiment remains weak due to renewed fears the Federal Reserve will soon start scaling back its stimulus.
The partially convertible rupee closed at 62.87 per dollar, compared to 62.93 on Thursday. It weakened to as much as 63.0850 during the day, its lowest since November 14.
Trading in the rupee has been volatile, starting the week with strong gains on hopes that the Fed would delay any tapering, only to falter as the week progressed as doubts about the US central bank's stance then crept in.
Overall, the rupee managed to post a weekly gain against the dollar and snap a five-week losing streak, although without much conviction.
In particular, traders are concerned foreign investors are losing interest in India, setting up the prospect of more falls in the rupee at a time when state-run oil companies are back to sourcing dollars in markets and not through a special swap window that had been created by the central bank.
Foreign institutional investors (FIIs) sold shares worth 598 million rupees ($9.5 million) on Thursday, snapping a 32-day buying streak that totalled 238.84 billion rupees, exchange and regulatory data show.
"The return of oil demand and tapering fears, coupled with FII flows showing signs of drying up, the rupee is seen to be under pressure in the coming days," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
Raina expects the rupee to trade in the 62.80 to 63.50 range in the next week.
The rupee rose 0.4% against the dollar during the week, snapping five weeks of falls.
Central bank intervention has helped support the rupee, preventing it from falling much below 63 this week. The Reserve Bank of India was again spotted selling dollars late in the session on Friday.
In the offshore non-deliverable forwards, the one-month contract was at 63.40/50, while the three-month was at 64.52/62.