MUMBAI The rupee dropped on Thursday snapping two days of gains that had sent the local currency to a nearly three-week high, while oil-related dollar demand also hurt.
Despite gains so far this year, the rupee's outlook for the remainder of 2013 is likely to be closely tied to how India deals with its current account and fiscal deficits at a time when its investment-grade sovereign ratings are under threat.
Globally, the dollar also recovered to hit a three-week high as the solution to the U.S. "fiscal cliff" was seen as setting up more budget wrangling ahead.
Views on the Indian rupee turned bullish as rate cut hopes are seen boosting domestic stocks, the latest survey of analysts showed.
"It's too optimistic to say that 2013 will be a good year for the rupee. Polls do show bullish views on the rupee but with the kind of volatility and pressure we have seen on rupee last year, I expect it to remain choppy with immediately support at 54," said Paresh Nayar, head of fixed income and forex at First Rand Bank.
Nayar added he expected the pair to trade in a 53.30-55.75 range over the next three months.
The partially convertible rupee closed at 54.49/50 per dollar compared to its close of 54.35/36 on Wednesday.
Traders said most of the rupee's weakness was triggered by dollar short-covering following the rupee's gains to 54.2650 per dollar on Wednesday, its strongest since December 14.
Oil firms, the largest buyers of dollars in the domestic currency market, were also spotted buying the greenback, while a slower pace of gains in shares compared to previous two sessions also failed to provide much direction to the rupee. .BO
Traders at least welcomed the Reserve Bank of India's announcement on Wednesday asking that volume and value restrictions be placed on gold imports.
However, they said any restrictions on gold imports, if placed to rein in a current account gap that touched an all-time high in the July-September quarter, would work gradually.
In the offshore non-deliverable forwards, the one-month contract was at 54.74 while the 3-month was at 55.30.
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 54.70 with a total traded volume of $4.4 billion.
(Editing by Sunil Nair)