Indian rupee off 2-mo low on possible RBI dlr sales.

MUMBAI, March 22 (Reuters) - The Indian rupee dropped to its weakest in more than two months on Thursday after weak Chinese and euro zone manufacturing data hit demand for risk, but suspected dollar sales by the central bank pulled the currency back from the day's lows.

Fears foreign investors would turn net sellers of Indian stocks also contributed to the rupee's fall after the prime minister's office moved to quell an outcry over a reported $211 billion loss in revenues from the sale of coalfields.

The partially convertible rupee ended at 51.17/18 to the dollar, after sliding to as low as 51.28 earlier, a level not seen since Jan. 16. The unit had closed at 50.66/67 on Wednesday.

Dealers said the Reserve Bank of India is likely to have intervened for a second in a session in a row to shore up the local currency, which has dropped around 2 percent in nearly a week.

"Global factors weighed more than domestic reasons, as unexpected weakness in euro zone PMI data caused a massive risk sell-off and hit currencies across the board," said a currency strategist for a foreign bank in Singapore.

The sell-off in the rupee accelerated after Germany and France reported an unexpected contraction in manufacturing activity, adding to earlier data showing China's economy is also slowing down.

Traders are closely looking at how foreign investors will react to a government under pressure. The coalfield sale report came on a day when India also announced a sweeping rollback of a rail fare hike.

That is adding to broad disappointment after India last week announced a bigger-than-expected borrowing plan as part of its 2012/13 budget.

"Post the budget, signs of optimism on India have reduced and could put the foreign institutional investors on a wait-and-watch mode," said J. Moses Harding, head of the asset liability committee at IndusInd Bank.

Persistent and large dollar demand from local oil importers as well as caution before the extended weekend hurt rupee, traders said. Debt and money markets will be closed on Friday for a public holiday, though stock exchanges will be open.

"Dollar demand is coming in thick and fast because tensions between Iran and United States are just going up," said a currency trader with a state-owned bank. "So importers will want to get their payments settled as soon as possible."

India imports more than 80 percent of its oil requirements, including a significant chunk from Iran, and the country's oil refiners are major buyers of dollars in the domestic currency market..

The one-month offshore non-deliverable forward contracts were at 51.69.

In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all ended around 51.30, on a total volume of $6.69 billion.

Source : in.reuters.com