India's core inflation in May was estimated at 4.85 per cent, but headline inflation rose 7.55 per cent, making it harder for the Reserve Bank of India to cut rates by more than 0.25 per cent or 25 basis points when it decides on monetary policy on Monday.
Declining confidence in India's economy has been a key factor behind the tumble in domestic assets, especially at a time of weakening global risk demand, and some investors had hoped the RBI would cut interest rates more aggressively.
The RBI may also opt to cut the cash reserve ratio, or the funds that banks must park with the central bank, in a bid to ease tight liquidity conditions that are also choking growth, according to analysts.
"I think a 0.25 per cent or 25 basis point cut is already factored in. But a bigger easing with a cash reserve ratio cut will have a positive impact on the rupee. However, it may not last long," said Pramit Brahmbhatt, chief executive at Alpari Financial Services India.
The partially convertible rupee closed at 55.80/81 per dollar as per SBI data, weaker than Wednesday's close of 55.68/69.
Brahmbhatt expects the rupee to trade in a 54.80-56.20 band to the dollar in the near term.
The rupee is also being buffeted by global headwinds as uncertainty continued over the future of the euro zone ahead of Sunday's cliffhanger election in Greece and the Federal Reserve's meeting next wee.
The BSE Sensex fell 1.2 per cent, its biggest percentage decline in two weeks.
The weakening growth prospects for India and the global economy were also reflected in trade data.
India's exports fell 4.16 per cent to $25.7 billion in May from a year ago, a senior trade ministry official said, citing provisional data.
The one-month offshore non-deliverable forward contracts were at 56.11 while the three-month was 56.86.
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 55.83 on a total volume of $3.2 billion.
Copyright @Thomson Reuters 2012