In step with local stocks, the rupee surrendered initial gains and declined 36 paise to a one-month low of 62.26 against the dollar Thursday amid demand from importers as the US currency strengthened overseas.
At the interbank foreign exchange market, the rupee started on a stable note from the previous close of 61.90 and climbed to the day's high of 61.74 as local stocks advanced.
However, the local currency fell sharply to a low of 62.28 after a drop in the domestic equity market amid weak European cues and a decline in manufacturing data in December.
The rupee closed at 62.26, a fall of 36 paise or 0.58 per cent, adding to Wednesday's 10-paise loss. The currency is at the lowest closing level since it reached 62.36 on December 3.
"Negative closing in the local stock markets and strengthening dollar index led to weakness in the rupee. Other than this, a large petrochemical company is said to have bought dollars from the market, which put pressure on the rupee," said Abhishek Goenka, CEO of India Forex Advisors.
The HSBC India Manufacturing Purchasing Managers' Index, a measure of factory production, dropped to 50.7 in December from 51.3 in November. A reading above 50 indicates growth.
The benchmark 30-share S&P BSE Sensex tumbled 252.15 points, or 1.19 per cent, erasing the day's gains. Foreign institutional investors bought shares worth a net Rs 10.16 crore yesterday, according to provisional data.
The dollar index, which measures the US currency against six major global rivals, was up 0.15 per cent ahead of US manufacturing data.
"After a strong opening, the rupee decreased and closed on a weaker note against the dollar, taking cues from negative local equities," said Pramit Brahmbhatt, CEO of Alpari Financial Services (India). "The dollar index...is trading strong."
Forward dollar premiums dropped further on continued receipts by exporters.
The benchmark six-month forward dollar premium payable in June tumbled to 248-1/2 to 250-1/2 paise from 256-258 paise on Wednesday and far-forward contracts maturing in December plunged to 488-490 paise from 495-497 paise.
The RBI fixed the reference rate for the dollar at 61.9020 and for the euro at 85.1556.
The rupee remained weak and ended at 102.97 against the pound from the overnight close of 102.30 and moved down further to 85.21 per euro from 85.08. It also fell to 59.07 per 100 Japanese yen from 58.81.