Weaker global risk assets sent the rupee lower for a third straight session on Friday, sparking an unexpected intervention from the RBI that prevented the currency from posting its biggest loss in two weeks.
The rupee had been on the backfoot through the session after monetary easing from central banks in the euro zone, Britain and China sparked worries about global economic growth.
Thin trading volumes were magnifying the movements in the rupee, traders said, and may have been a key reason why the RBI sold dollars for the first time since June 26, during the aftermath of the rupee's record low of 57.32 to the dollar hit on June 22.
The rupee could fall further on Monday after lower-than-expected U.S. jobs monthly data sent global markets tumbling, raising worries about the world's biggest economy, though it could open up the prospect of more quantitative easing.
"The dollar-rupee should trade in a narrow range next week, with intervention at higher levels and good amount of buying at lower levels," said Ashtosh Raina, head of forex trading at HDFC Bank, in comments made before the data.
"Further, today's NFP data is crucial because if poor data comes, it will increase the possibility of quantitative easing," he added, referring to non-farm payrolls.
The partially convertible rupee closed at 55.42/43 as per the SBI closing rate, down 0.9 percent from its Thursday's close of 54.94/95. The pair moved in a wide range of 54.25 to 54.68 during the day.
Traders said the central bank was spotted selling dollars starting at 55.62 levels.
The rupee had started the week on a strong note, gaining over 5 percent in the four sessions from June 28 to Tuesday, before ending the week in a period of consolidation, but still managing a 0.3 percent gain for the week.
Risk assets were under pressure on Friday on widespread fears about the global economy. The euro stayed close to a five-week low against the dollar and hit record lows against some other major currencies.
Should the U.S. Federal Reserve opt for more quantitative easing, it could pressure the dollar and lift risk assets and bring more flows into higher-yielding assets such as in India, though whether the U.S. central bank would so remains uncertain.
"The broad range for the USD/INR remains 54.00-54.30 to 55.80-56.00. Unless euro breaks out of $1.2280-$1.2750 which was its recent range, this USD/INR range will play out next week," a senior trader with a private bank said.
"Today, overall the markets were thin and highly illiquid, so even marginal flows were moving the markets by 20-30 paise. RBI thus had to step in, in late trade," he added.
The one-month offshore non-deliverable forward contracts were quoted at 55.71 while the three-month were at 56.38.
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 55.73. The total volume was at $4.7 billion.