MUMBAI The rupee weakened on Tuesday, retreating sharply from a more than one-week high touched in the previous session, hit by a global sell-off of risk assets and month-end dollar demand from importers.
Italy's inconclusive election result sparked a sell-off on world equity markets and sent safe-haven German bond yields sharply lower as investors feared a resurgence of the euro zone debt crisis.
Caution is expected to prevail ahead of the 2013/14 budget to be presented on Thursday, with investors expecting a fiscally disciplined budget, although credibility on how to shore up finances will also be key.
"Until the budget, global factors could be the guiding force for the rupee, so it will watch the euro and other majors for direction for now," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank.
"I am expecting the rupee to trade in a range of 53.70 to 54.35 until the budget," he added.
The partially convertible rupee closed at 54.09/10 per dollar versus its previous close of 53.8650/8750. The unit had touched a more than one-week high of 53.86 on Monday.
The sharp fall in domestic share markets hurt the rupee.
Shares fell more than 1 percent to their lowest close in three months as blue chips were hit by caution ahead of the budget.
Traders said oil firms, the biggest buyers of dollars in the domestic currency market, were consistently seen buying the greenback, keeping the downward pressure on the local unit.
India's budget for the fiscal year starting in April will be key to shoring up investor confidence amidst hopes for measures that will help boost investment and bring in foreign fund inflows.
The onshore forward premiums, however, eased on position unwinding. The one-year onshore premium dropped to as much as 354 points from 359 points on Monday.
In the offshore non-deliverable forwards, the one-month contract was at 54.42 while the three-month was at 55.08.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange closed at around 54.43 with a total traded volume of $5.14 billion.
(Editing by Subhranshu Sahu)
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