Mumbai: The rupee on Tuesday depreciated by 20 paise to close at 54.37 in line with decline in local equities following withdrawal of support by DMK to the Congress-led UPA government, even as RBI cut repo rate cut.
Sustained dollar selling by exporters amid firm USD overseas also kept the rupee under pressure.
At the Interbank Foreign Exchange (Forex) market, the local unit commenced strong at 54.06 a dollar from previous close of 54.17 and rallied further to over two-week intra-day high of 53.90 on initial rise in stocks and rate cut by RBI.
It later turned bearish in tandem with equities after the news of withdrawal of support by DMK oozed in and fell back to a low of 54.4750 before settling at 54.37, a net fall of 20 paise or 0.37 percent.
The Reserve Bank of India (RBI) today in its mid-quarter monetary policy meeting cut the short-term lending rate (repo) by 25 bps to boost the economic growth while kept the cash reserve ratio (CRR) unchanged.
The central bank, however, indicated limited scope for further easing of rates on account of high food inflation and current account deficit (CAD).
The DMK supremo M Karunanidhi withdrew support from the ruling UPA government over the issue of alleged human rights violations of Tamils in Sri Lanka, which further weighed on the market sentiment.
The Indian benchmark today plunged by 285.10 points or 1.48 percent, extending losses for the third straight session while FIIs infused Rs 506.01 crore yesterday, as per provisional data with stock exchanges.
The dollar index was up by 0.08 percent against a basket of six major currencies.
"The rupee weakened today as Indian stocks closed down as the regional DMK party withdrew from the ruling coalition in protest against the government's position on a United Nations resolution on war crimes carried out during Sri Lanka's civil war.
"These domestic concerns are coming at a time when investors are also growing concerned about foreign flows after Cyprus is keeping risk assets under pressure," said Pramit Brahmbhatt CEO, Alpari Financial Services (India).
"Markets did not react to the rate cut decision made by the RBI and instead focused on its warning that the scope for further monetary easing was limited. The dollar traded strong ahead of a slate of economic data," he added.
Meanwhile, the premium for the forward dollar recovered on fresh payments from banks and corporates.
The benchmark six-month forward dollar premium payable in August rose to 176-1/2-178-1/2 paise from Monday's close of 174-1/2-176 paise.
Far-forward contracts maturing in February also firmed up to 340-342 paise from 335-337 paise.
The RBI fixed the reference rate for the US dollar at 54.2635 and for euro at 70.2140.
The rupee declined further against the pound sterling to 82.23 from overnight close of 81.92 while fell back against the euro to 70.39 from 70.16.
It, however, edged up against the Japanese yen to 57.03 per 100 yen from 57.05.