Rupee falls, custodian banks sell dollars

The rupee fell on Wednesday, tracking weaker global risk assets such as the euro, though large dollar sales by custodian banks helped support the domestic currency.

Global risk sentiment continued to be dragged by euro zone concerns as a judgement from a German court on the euro zone's bailout funds is seen as unlikely to come quickly, potentially prolonging the uncertainty about the crisis.

Traders are also gearing up for India's industrial output data on Thursday and wholesale price inflation on Monday.

Concerns about India's fiscal and economic outlook had pummelled the rupee to a record low of 57.32 against the dollar late last month, though the currency has since recovered strongly.

"The worst for rupee is seen to be already behind. The strong headwinds from external sector stand diluted," said J. Moses Harding, head of asset liability at IndusInd Bank.

"There is genuine supply of dollars from exporters and FIIs on rupee weakness into 55.60-56.10. This level is seen as the worst case for rupee," he added referring to foreign institutional investors.

The partially convertible rupee closed at 55.62/63 as per the SBI closing rate, down from its Tuesday's close of 55.39/40.

Risk aversion pressured the rupee, with the BSE Sensex falling 0.7 percent.

However, dollar sales from custodian banks helped cap broader losses.

Three dealers added a Japanese bank sold between $270-$300 million, which they speculated could be tied to Kobe Steel's investment in an unit in eastern India as part of a joint venture with Steel Authority of India .

The one-month offshore non-deliverable forward contracts were quoted at 55.91 while the three-month were at 56.54.

In the currency futures market, the most traded near-month dollar-rupee contract on the National Stock Exchange, the United Stock Exchange and the MCX-SX all ended at around 55.65. The total volume was at $5.5 billion.