The rupee weakened on Tuesday as month-end dollar demand from importers and a weak domestic sharemarket weighed on sentiment.
Dealers said the dollar's gains versus major currencies also piled downward pressure on the local currency.
At 9:40 a.m. (0410 GMT), the partially convertible rupee was at 46.44/45 per dollar, half a percent weaker than its close of 46.20/21 on Monday.
"There is month-end demand in the market, negative Asian stocks and a weak euro are all hurting the rupee," a senior foreign exchange dealer with a private bank said.
Oil is India's biggest import and refiners are the largest buyers of dollars in the local currency market with demand tending to peak at the end of each month when they are required to make payments for their imports.
"Further weakness in the rupee is possible if the euro breaks $1.2250 but at the moment the rupee looks likely to hold in a range of 46.35-46.50," the dealer said.
Indian shares fell 0.5 percent in early trade, with financials leading the decline, taking cues from mostly weak Asian markets.
Foreign fund flows into and out of stocks play a crucial role in determining the rupee's fortunes. So far in June, foreigners have bought a net $1.9 billion worth of shares, almost reversing the $2 billion outflows seen in May.
Foreigners are net buyers of $6.5 billion so far in 2010.
The euro was under pressure on Tuesday and dangerously close to a key support level, as funding concerns about the euro zone drove investors to the safe-haven Swiss franc.
The index of the dollar against six major currencies was up 0.1 percent, and would be closely watched, dealers said.
One-month offshore non-deliverable forward contracts were quoted at 46.62, much weaker than the onshore spot rate.
In the currency futures market , the most traded near-month dollar-rupee contracts on the National Stock Exchange and MCX-SX were both at 46.58, with the total traded volume on the two exchanges at about $600 million.
Source : sify.com