Mumbai: The rupee fell for a second straight session on Thursday, consolidating after a recent rally as traders braced for an interest rate cut from the European Central Bank that, as expected, was delivered after the close of markets.
The ECB cut its main interest rate to a record low of 0.75 per cent, sending the euro sharply lower against major currencies, and setting up the prospect of further weakness ahead for the rupee.
However, in an unexpected decision, China also cut interest rates on Thursday, helping the rupee cut losses late in the session as it was announced shortly before the close of domestic currency markets.
China's easing action should in theory be a potentially more positive factor for global risk assets given it could help revive growth in a key market for emerging countries, though traders said the impact could be blunted by the ECB.
"The rupee started recovering after the China move in late trade, but the gains will be short-lived, we can expect further weakness tomorrow," a senior dealer with a state-run bank said.
The partially convertible rupee closed at 54.94/95 per dollar, weaker than its previous close of 54.48/49, but off the day's low of 55.2350.
The rupee had been at around 55.20 levels when the China rate decision was announced.
The rupee had rallied more than 5 per cent in the four sessions from June 28 to Tuesday, sparked by hopes of renewed commitment by the government to tackle policy reforms. Investors also saw a currency that earlier in June had hit a record low as oversold.
Global risk factors are likely to continue to determine the rupee's outlook in the near-term, with the U.S. monthly jobs report on Friday now looming as the next key event.
That is especially the case given the lack of obvious domestic drivers. Demand from oil firms tends to wane at the beginning of the month, only to pick up as the month progresses.
"Lack of dollar supplies and demand from oil firms hurt the rupee," said Hari Chandramgathan, a forex dealer with Federal Bank.
"The ECB rate cut is almost discounted by the market, but we might still see one more leg down for the euro and that may trigger rupee selling. I am expecting the USD/INR to pullback towards 55.30 or 55.70 tomorrow," he added.
Technical charts show the rupee could target 55.37, which marks the 38.2 per cent Fibonacci retracement of its gains from a record low of 57.32 on June 22 to a high of 54.18 on Wednesday.
Still, longer-term investors are no longer as bearish as they once were. The one-month offshore non-deliverable forward contracts were quoted at 55.22 while the three-month were at 55.91.
Meanwhile, a Reuters positioning poll showed analysts have sharply lowered their bearish bets on the rupee due to mounting hopes for reforms since Prime Minister Manmohan Singh took over the running of the finance ministry.
In the currency futures market, the most traded near-month dollar-rupee contract on the National Stock Exchange, the United Stock Exchange and the MCX-SX all ended at around 55.17. The total volume was at $5.1 billion.
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