The rupee weakened on Monday, snapping two sessions of gains, as dollar demand from oil companies to meet month-end import commitments far outweighed foreign fund inflows seen into domestic stock markets.
The falls in the rupee came even as the benchmark BSE index rose 1.8 percent to post its biggest daily percentage gain in a month, tracking a rally in global risk assets as investors hope for global monetary stimulus steps.
Investors are also growing cautious ahead of the Reserve Bank of India's 's monetary policy review on Tuesday, as the central bank is widely expected to hold key rates steady.
A rate cut could benefit the rupee by attracting flows into equities and bolstering confidence in the beleaguered Indian economy, though few expect that outcome especially after the Reseve Bank of India (RBI) bank warned of persistent inflation in its quarterly report issued after the market close.
"It was mainly oil demand which hurt the rupee today. Euro came down and oil demand had been good. Didn't see any major dollar selling today," said Paresh Nayar, head of fixed income and forex and First Rand Bank in Mumbai.
The partially convertible rupee closed at 55.5850/5950 per dollar, weaker than its close of 55.33/34 on Friday.
Oil refiners, particularly a large state-run oil company, were spotted buying dollars, traders said.
The rupee weakened further as the euro slipped on Monday, with traders taking profit on the gains enjoyed late last week.
Although traders don't expect the RBI to take action, global markets are benefitting from hopes the European Central Bank and the Federal Reserve could announce this week more monetary stimulus measures.
That opens the possibility of gains in risk assets such as the rupee, depending on the scope of any action.
The one-month offshore non-deliverable forward contracts were at 55.90 while the three-month was at 56.54.
In the currency futures market, the most-traded near-month dollar rupee contracts on the National Stock Exchange, the MCX-SX and United Stock Exchange all closed at around 55.76 with a total volume of around $3.3 billion.
(Editing by Rafael Nam)
