The rupee fell for a third consecutive session on Tuesday, hitting at one point its lowest against the dollar in more than a week, as flat domestic output growth exacerbated concerns about a sharply slowing economy.
Industrial output in April grew just 0.1% from a year earlier.
The data comes after India posted its weakest economic growth in nine years during the January-March quarter, while Standard & Poor's has warned the country could be the first Bric country to lose its investment-grade rating.
The growing uncertainty about India's outlook as well as its fiscal position are sparking fears of foreign outflows at a time when global risk aversion is high because of the euro zone and fears of steep slowdowns in other major global economies.
"Basically, the rupee has moved in line with the euro. The near term outlook continues to be bearish with the next trigger likely to be the Greek elections (on June 17)," said Naveen Raghuvanshi, associate vice president at Development Credit Bank.
The partially convertible rupee closed at 55.80/81 per dollar as per SBI data, weaker than Monday's close of 55.74/75.
The rupee had fallen to as low as 56.08 to the dollar, marking its lowest since June 1. The currency could face near-term support at 56.28, traders said, the session low marked during that session.
Still, the rupee has recovered some ground after hitting a record low at 56.52 against the dollar on May 31, the culmination of a series of record lows hit last month.
In the near-term, traders are likely to react not only to the global risk environment but also the domestic economic data.
The wholesale price index for May due on Thursday is expected to have grown at the fastest pace this year, which may complicate expectations for interest rate cuts from the Reserve Bank of India during its policy meeting on June 18.
Hopes the RBI would cut interest rates, and possibly even the cash reserve ratio, sparked gains in stocks on Tuesday and sent bond yields and swap rates to multi-month lows.
The one-month offshore non-deliverable forward contracts were at 56.19 while the three-month was 56.96.
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 ended around 55.9050 on a total volume of $4.7 billion.
