MUMBAI The rupee posted its biggest single session loss in more than 3 months on Thursday on the back of persistent dollar demand from oil importers, while negative local shares triggered foreign fund outflow worries.
The rupee ended at 51.39/40 to the dollar, 1.2 percent weaker than Wednesday's close of 50.775/785, its sharpest drop in a single session since December 12.
"There is a lot of demand seen in the market, which will drag the rupee down further on Friday," a foreign exchange trader with a foreign bank said.
Oil importers have been buying aggressively in the market to meet month-end payment obligations. Oil is India's largest import item and refiners are the biggest buyers of dollars in the local market. Oil prices held near $124 a barrel on Thursday.
Traders said the Reserve Bank of India could intervene in the foreign exchange market if the rupee continued to fall sharply.
The RBI sold a net $7.3 billion in January in the spot market, after sales of $7.8 billion in December. However, it has maintained it does not target any particular exchange rate and intervenes only to smooth volatility.
The BSE Sensex fell 0.4 percent, with technology stocks leading the losses.
Global stocks dipped after disappointing U.S. data continued to temper risk appetite.
The euro fell against the dollar and the yen as concerns about contagion from the euro zone debt crisis resurfaced, with investors wary on the common currency ahead of Spain's budget on Friday.
Traders watch the euro's movement against the dollar for direction for the rupee.
Worries over the fiscal situation in India have also been a persistent concern for the rupee's fortunes.
"The rupee has been under pressure from a disappointing budget plan for 2012/13, which assumes a large deficit, 5.1 percent of GDP, after significantly lagging the 2011/12 target and recording a gap of almost 6 percent of GDP," Credit Agricole CIB said in a note.
The one-month offshore non-deliverable forward contracts were at 51.85.
In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and on the United Stock Exchange all ended around 51.7, on a combined volume of $4.2 billion.
(Editing by Subhadip Sircar)