The rupee on Thursday lost 47 paise to close at a 50.38/39 against the US dollar as dealers bought dollars in order to hedge their position against any unexpected announcement in the Budget.
Market participants were also disappointed by the status quo in credit policy by the Reserve Bank of India, as they were expecting a rate cut.
"Dealers adopted cautious approach on Thursday in anticipation of any major announcements in budget," said Pramit Brahmbhatt, chief executive officer, Alpari Financial Services (India). "The Budget will set the direction for the rupee," he added.
After falling in 2011, the rupee has strengthened in 2012 as foreign funds have poured nearly $13 billion into local stocks and debt so far in 2012, an indication of the bullish outlook on India.
Traders also believe that the central bank could intervene to halt a further drop in the Indian currency.
The RBI has been actively intervening in the currency markets over the past few months to support the rupee, which touched a record low of 54.30 on December 15.
Data released by the RBI this week showed the bank sold a net $7.3 billion in the spot market in January, after sales of $7.8 billion in December.
In New York, the dollar rose to an 11-month high against the Japanese yen and posted gains against other currencies on Thursday.