Rupee falls to monthly low; reforms watched

An employee uses an electronic machine to check a rupee note inside a bank in Allahabad December 16, 2011.

MUMBAI (Reuters) - The rupee fell on Tuesday to its lowest this month, as worries about the euro zone crisis continues to hit global risk assets such as the euro, while investors grow warier after still waiting for government word on policy reforms.

Dollar sales from a telecoms company helped the rupee earlier in the session, but otherwise the local currency traded within a range, reacting mainly to euro movements given the absence of any domestic policy triggers.

Hopes the government would act on long-stalled reforms such as opening up the aviation and retail sectors to foreign investment, or raising diesel prices, had sparked a rally in the rupee from its record low against the dollar in late June.

However, recent signs of opposition from government allies are leading to some caution, as reflected in the weakening of the rupee and in non-deliverable forward markets.

"The market is waiting for roll out of policies by the government, especially in the area of FDI," said N. S. Venkatesh, treasurer at IDBI Bank.

The partially convertible rupee fell for a third consecutive session, closing at 56.12/13 per dollar, as per the SBI closing rate from its close of 55.9650/9750 on Monday.

The rupee earlier fell to a session low of 56.17, its lowest since June 29.

Global risk sentiment will dictate the rupee's moves in the near-term, dealers said.

The euro fell against the dollar on Tuesday after weak German economic data fueled concerns about slowing growth in Europe's largest economy, and looked likely to extend losses on mounting concerns Spain may need a full bailout.

In India, action from the government would be key to bolster confidence in the rupee, especially as worries mount that the crucial monsoon rains will be below average.

Offshore traders are also starting to price in a potentially weaker rupee.

One-month offshore non-deliverable forward contracts were around 56.51, while the three-month was at 57.20, not far off the record low 57.32 for spot rupee hit last month.

In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and United Stock Exchange all closed at around 56.24, with the total traded volume at around $5.1 billion.

(Editing by Rafael Nam)