MUMBAI The rupee weakened for a fourth straight session on Monday as importers including oil refiners stepped up dollar purchases while the lack of dollar inflows exaggerated the local unit's fall.
Traders said losses in the domestic share market further added to the negative sentiment for the rupee.
Caution also prevailed ahead of the Reserve Bank of India's policy review on Tuesday. The central bank is expected to keep interest rates unchanged, but may deliver a cut in the cash reserve ratio (CRR) for banks, analysts said.
However, some analysts, including Goldman Sachs, said the RBI may deliver a surprise rate cut after data on Friday showed much lower-than-expected inflation last month.
"I think the RBI has a knack of surprising markets, so I am expecting a rate cut tomorrow," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
"But in either case, medium-term view for the rupee is weak. In case of a rate cut, it may be seen as a dip which can be used to buy," he said.
The partially convertible rupee closed at 54.84/86 per dollar, weaker versus its previous close of 54.4850/4950. It dropped as low as 54.89 in late trade, its weakest since December 4.
Shares were choppy ahead of the policy. The main share index closed down 0.4 percent. .BO
Traders said oil firms, the biggest buyers of dollars in the domestic currency market, were also among the key buyers in the market. Some exporters however stepped in to sell the greenback around 54.80 levels, limiting a further sharp fall.
Looking ahead to 2013, the RBI is widely expected to start cutting interest rates as early as January, which may bolster confidence about the economic outlook and lift the rupee.
However, investors will also monitor the government's efforts to contain the fiscal deficit for the year ending in March at 5.3 percent, given uncertainty over stake sales in state-run companies and soaring subsidies.
In the non-deliverable forwards market, the one-month contract was at 55.19 while the three-month was at 55.68.
In the onshore forwards, the one-month premium rose to 35 points from 32 points on Friday while the 1-year fell to 319.25 points from 323.75 points.
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 at around 54.9250 with a total traded volume of $4.84 billion.
(Editing by Sunil Nair)