The rupee weakened on Thursday, posting its biggest single-day decline in more than two weeks, after shares fell over 1 per cent while dollar demand from importers, particularly oil companies, was strong.
Traders said investors also decided to cover their short dollar positions after the rupee failed to gain past 62 in opening deals despite much better-than-expected consumer inflation data.
Data late on Wednesday showed retail inflation slowed to a two-year low in January, but a third straight fall in industrial output in December offered little hope for an economic rebound.
"There was good demand for dollars from state-run banks, particularly for oil, today. Even foreign funds seem to have sold dollars," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank.
"Overall, the dollar has strengthened against emerging currencies recently. The dollar's moves will be watched along with the wholesale price data tomorrow but the market is expecting a soft number."
The partially convertible rupee closed at 62.42/43 per dollar compared with its previous close of 62.09/10. The rupee had gained to 62.01 in early trade, its strongest since January 23.
Shares fell more than 1 per cent to post their biggest drop in one-and-a-half weeks as Cipla Ltd and Coal India Ltd slumped following disappointing earnings, while other blue chips tracked weaker global markets.
Foreign institutions have sold a net $409.31 million so far in February, taking net sales in 2014 to $284.7 million.
In the offshore non-deliverable forwards, the one-month contract was at 62.75 while the three-month was at 63.61.
Copyright @ Thomson Reuters 2014