The rupee dipped below 53 to the dollar to touch a near 4-month low on Wednesday, but suspected RBI intervention helped it recoup some losses.
Sustained dollar demand by oil importers kept the rupee under pressure through most of the session on Wednesday, dealers said, with the local currency bucking the gains in other emerging market currencies.
The rupee has been routed recently because of worries about India's fiscal and economic challenges, and fears that waning foreign flows will prevent the country from narrowing its current account deficit.
The rupee fell to a low of 53.02 to the dollar on Wednesday, a level last seen on Jan 5, before it pulled back to 52.92/93 levels.
Four dealers said that state-run banks were seen selling dollars when the rupee broke below the 53 level, likely on behalf of the Reserve Bank of India.
A UK bank was also seen selling about $100-$150 million on behalf of a large software firm, dealers said.
Despite the suspected intervention on Wednesday, traders said the RBI will be unable to step in decisively should the rupee continue its falls.
Dollar selling from the central bank would exacerbate an acute liquidity crunch in India's banking system, according to dealers, as shown by repo borrowings that have surpassed the 1 trillion rupee mark for six days in a row.
Economists also say India's relatively modest forex reserves do not provide enough firepower for a strong defense of the rupee.