The rupee posted its biggest single-day fall in more than four months, tracking steep losses in emerging market currencies while domestic data showing an unexpected contraction in industrial output sparked concerns about economic growth.
The falls pushed the rupee to a new 10-1/2 month low against the dollar on Monday, in a session when the Indonesian rupiah hit a 16-year low amidst a slump in crude prices and worries about US rate hikes expected next year.
The central bank was seen as having stepped in to prevent more losses in the rupee.
"Today, RBI sold dollars at 62.70 to contain rupee's rapid fall but the dollar demand was huge," said Param Sarma, chief executive officer at NSP Forex, a consultancy and brokerage firm.
"While one can expect the central bank to intervene regularly to halt the rupee's fall, rupee could possibly weaken to 63.30 or thereabouts by end-December before any recovery is seen," he added.
The partially convertible rupee closed weaker at 62.94/95 per dollar, after hitting 62.95, its lowest level since Jan 28 compared with Friday's 62.29/30 close.
The unit dropped 1.03 percent on the day, its biggest single-day decline since its 1.05 per cent fall on Aug. 6.
Domestic investors were a bit spooked after data late on Friday showed India's factory output contracted in October, its worst performance in three years. Still, easing consumer and wholesale inflation are raising expectations the Reserve Bank of India will cut interest rates at its next policy review.
Losses in domestic shares to 1-/1/2 month lows also hit sentiment for the rupee.
Foreign funds have sold shares in each of the last four trading sessions until Friday but remain buyers of debt so far in December.
Total inflows into the two asset classes stand at $17.1 billion and $26.3 billion, respectively so far in 2014.
In the offshore non-deliverable forwards, the one-month contract was at 63.26, while the three-month was at 63.89.
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