The rupee fell to a near one-week low on Monday after Standard & Poor's warned the country may be the first to lose its investment-grade rating among Bric nations, adding to worries about India's fiscal and economic outlooks.
The S&P report, which was dated Friday, did not add any new concerns to those the agency had already listed in April, when it cut the outlook for India's "BBB-" rating to "negative.
The rupee's reversal came after the local currency had last week gained against the dollar, rebounding from the record low of 56.52 against the dollar hit on May 31.
India is facing a couple of critical weeks, with industrial output and inflation data due out this week, while the Reserve Bank of India meets on June 18 amid widespread expectations for a rate cut.
Global risk sentiment will also be key to the rupee's outlook, with doubts about whether the relief rally seen on Monday, following a bailout package for Spanish banks, will hold.
"There was massive demand from PSU banks today and the market is still jittery about Greece. The S&P headline just added some fuel to the fire," said Agam Gupta, managing director in the FX and rates division at Standard Chartered Bank in Mumbai, referring to public sector banks.
He expects the rupee to trade in the 55-56.50 range to the dollar during the week.
The partially convertible rupee closed at 55.74/75 per dollar as per SBI data, weaker than Friday's close of 55.42/43. It fell to 55.82 at one point in trade, its lowest since June 5.
The rupee had tumbled in May, hitting a series of record lows against the dollar as the steep global risk aversion exacerbated concerns about India's economic and fiscal outlooks.
A sharp slowdown in January-March economic growth has sparked expectations the RBI will cut interest rates next week, but much will depend on this week's data.
India's industrial output probably eked out a small rise in April over a year earlier of just 1.7% after falling in March, a pace suggesting little pick up in the economy after a slump in growth at the start of the year.
The one-month offshore non-deliverable forward contracts were at 56.07 whil the three-month was 56.82.
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 55.8950 on a total volume of $5 billion.