MUMBAI The rupee dropped for a fifth straight day, weakening to its lowest level in three weeks on Tuesday as heavy dollar demand from oil and defence firms offset inflows into the domestic stock markets.
Exporters also refrained from selling dollars at current levels on expectations of further weakness after the central bank disappointed markets by keeping key rates on hold at its policy review. Though the outcome was widely expected, investors had been hoping for a surprise cut in rates.
The central bank maintained a status quo ignoring government pressure to reduce borrowing costs, but said it was shifting its focus towards boosting a flagging economy, raising the odds of a rate cut as early as January.
"Stocks, euro and all other things are positive but the INR is weakening because of strong demand. Once that demand is over, we may see some positive moves in the rupee," said Uday Bhatt, a foreign exchange dealer with UCO Bank.
"There are flows but demand surpasses that. There was good demand from oil and defence heard today. I expect the pair to move in a 54.75 to 55.10 range tomorrow," he added.
The partially convertible rupee closed at 54.85/86 per dollar, after having dropped as low as 55.0550, its weakest since November 29. The unit had closed at 54.84/86 on Monday.
Oil firms, the largest buyers of dollars in the domestic currency market, have been buying the greenback aggressively in recent sessions, hurting the rupee.
The dollar index fell to a two-month low on Tuesday, with the U.S. currency dipping against the euro after signs of progress in negotiations over the so-called U.S. fiscal cliff helped lift market sentiment.
The Sensex rose led by lenders such as SBI, as hopes parliament will pass the banking amendment bill outweighed disappointment after the RBI policy decision.
In the non-deliverable forwards market, the one-month contract was at 55.17 while the three-month was at 55.66.
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 54.96 with a total traded volume of 5.14 billion.
(Editing by G.Ram Mohan)