The rupee fell for a fourth successive session on Wednesday on growing worries of a government dithering despite mounting fiscal and economic challenges, although a late recovery in the euro helped offset most losses.
A senior oil ministry official told reporters on Wednesday a hike in fuel prices was unlikely before September, denting hopes the government would push for policy reforms in the window between presidential elections last week and the start of parliament's monsoon session in early August.
Raising fuel prices, especially diesel, is seen key to reduce the government's fiscal subsidy burden, as are other steps such as opening up multi-brand retail and aviation to foreign investors.
Hopes for policy reforms had shored up confidence in the rupee since it hit a record low against the dollar in late June, and have led foreign investors to buy a net 98.2 billion rupees in domestic stocks so far this month.
"We are not seeing any concomitant measures by the government. Unless the economy does well, I do not see inflows sustaining," said M. Natarajan, head of treasury at Scotiabank in Mumbai.
The partially convertible rupee closed at 56.16/17 per dollar, as per the SBI closing rate, not far from its close of 56.12/13 on Tuesday.
Three-month offshore non-deliverable forward contracts were trading at 57.23, not far off the record low of 57.32 hit on June 22. The one-month contract was around 56.52.
The spot rupee had earlier fallen to as low of 56.44, its lowest level in nearly a month.
The recovery came after the euro rebounded from a two-year low against the dollar after European Central Bank policymaker Ewald Nowotny said he could see grounds for giving the euro zone bailout fund a banking licence.
Month-end dollar demand from oil companies, already seen on Wednesday, is expected to increase in the week ahead, and could further pressure the rupee.
"The rupee will continue to depreciate this week on defense and oil import related dollar payments," said Aurobinda Prasad, head of research for currency and commodity at Karvy Comtrade.
In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and United Stock Exchange all closed at around 56.19, with the total traded volume at around $5.8 billion.