MUMBAI The rupee fell to its lowest in three months on Wednesday, erasing all intraday gains as traders bet on a much more cautious Reserve Bank of India (RBI) now that it has delivered a bigger-than-expected rate cut.
Lingering concerns over India's widening current account deficit (CAD) and its high fiscal deficit was particularly seen hurting the rupee's ability to gain vis-a-vis the dollar, traders said.
Domestic stocks also came off their earlier highs on Wednesday, further weighing on the rupee.
"It (rupee) may not appreciate substantially from current levels due to the CAD, BOP (balance of payments) situation, coupled with reduced maneuverability for the central bank due to high fiscal deficit," said N.S. Venkatesh, treasurer at IDBI Bank.
The rupee closed at 51.78/79 to the dollar from Tuesday's close of 51.48, marking its lowest level since Jan 16.
Traders said the rupee looked set to fall further and are eyeing initial support at 52.12, the 61.8 percent retracement of the December-February gains.
The Reserve Bank of India which cut rates on Tuesday by an unexpectedly sharp 50 basis points but warned there was limited scope for more cuts due to upside risks to inflation, which stood at 6.89 percent in March.
"A big joker in the pack is also oil prices. If these flare up due to any reason then all bets are off," Venkatesh said.
India is vulnerable to fluctuations in global oil prices since it imports more than 80 percent of its crude oil needs.
Standard Chartered in a research note on Tuesday said technical data was suggesting a period of consolidation for the rupee and maintained its short-term "neutral" rating on the currency.
The one-month offshore non-deliverable forward contracts were at 51.78.
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 51.90, on a total volume of $3.64 billion.
(Editing by Rafael Nam)