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MUMBAI (Reuters) - The rupee ended largely steady on Tuesday after dropping to its lowest in three weeks earlier as data showed a contraction in industrial output but continued high consumer inflation raised uncertainty about how aggressively the RBI would cut interest rates this year.
Continued heavy dollar demand from oil firms and other importers also pressured the rupee on Tuesday, which fell for a fifth consecutive session, its longest losing streak in two months.
Still, the local unit saw strong support at 54.00-54.05 levels, helping it to close off the day's lows.
Traders will now await the wholesale priced-based inflation on Thursday for a clearer view on future rate cut prospects. WPI-based inflation likely eased again in January to 7 percent, its lowest level in over three years, according to a Reuters poll.
"Oil firms were there in the market and we saw other importers panic too. NDF was higher and the weak IIP data triggered further weakness," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.
"We saw some exporters come in to sell (dollars) in the last hour. I expect 54.30 to be a strong support for the rupee, holding the unit in a 53.40 to 54.30 range for the rest of the week," he added.
The partially convertible rupee closed at 53.85/86 per dollar, after hitting 54.07, its weakest since January 18 and largely unchanged from its close of 53.8450/8550 on Monday.
India's industrial production unexpectedly shrank for a second straight month in December, according to data on Tuesday, weighed down by weak investment and consumer demand.
Separate data on Tuesday also showed consumer price inflation inching up to 10.79 percent in January from 10.56 percent a month ago.
That made it uncertain about whether the RBI would focus on growth or on inflation. RBI governor Duvvuri Subbarao has added to this uncertainty by recently stressing the current account deficit is another factor considered when formulating monetary policy.
The rupee on Tuesday was also pressured by good demand from oil and gold importers looking to book imports at current levels, fearing the rupee may drop further from here on.
A nuclear test by North Korea failed to have much impact on global currency markets, although the yen fell slightly after the Group of Seven industrialised countries reaffirmed their commitment to market-determined exchange rates.
Onshore forward premiums also rose with the one-year premium climbing to a more than 14-year high. The one-year rate rose to 358 points, its highest since October 1998 and above its close of 356 points on Monday.
In the offshore non-deliverable forwards, the one-month contract was at 54.18 while the three-month was at 54.77.
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 all closed at around 54.04 with a total traded volume of $5.8 billion.
Editing by Sunil Nair