MUMBAI The rupee fell on Friday as factory output contracted and exports fell for the eighth straight month, highlighting the currency's vulnerability to a weak economy despite sustained capital inflows.
The rupee started the session on a strong footing on overnight euro gains after the European Central Bank kept rates on hold on Thursday, but large government-related dollar buying by a state-run bank and weak exports pushed the local unit to the day's low of 54.8450 per dollar, dealers said.
India will release inflation numbers on Monday, the last crucial data point before the Reserve Bank of India's rate review on January 29 when the central bank is expected to cut rates for the first time since April.
Wholesale prices are expected to have risen 7.40 percent from a year ago, a Reuters poll showed.
"The rupee has been gaining from flows but fundamentals continue to remain weak. The currency is not being able to sustain gains as importer buying is coming in at lower levels," said Subramanian Sharma, director at Greenback Forex.
The partially convertible rupee closed at 54.755/765 per dollar, weaker than Thursday's close of 54.56/57, snapping three sessions of gains.
Caution prevailed ahead of WPI after industrial output unexpectedly shrank 0.1 percent in November from a year earlier, although the weak indicator at least helped back the case for an interest rate cut.
Data on Friday also showed trade deficit narrowed to $17.7 billion in December from $19.3 billion in November, but exports fell for an eighth straight month, worrying investors.
Still, large capital inflows driven by global liquidity have been able to support the rupee which still ratcheted up its second weekly gain in three, rising 0.6 percent.
In the offshore non-deliverable forwards, the one-month contract was at 55.06, while the three-month was at 55.63.
In the currency futures market, the most-traded near-month dollar/rupee contract on the National Stock Exchange, the MCX-SX and the United Stock Exchange, all closed around 54.91 with a total traded volume of around $4.8 billion.
(Editing by Subhranshu Sahu)