The local currency dropped on a day when the equity benchmark Sensex spurted by over 170 points.
At the Interbank Foreign Exchange (Forex) market, the rupee commenced lower at 62.02 a dollar from the previous close of 61.84. Later, it declined to a low of 62.31, before settling at 62.20, a fall of 36 paise or 0.58 per cent.
In the previous two sessions, rupee rose by 58 paise or 0.93 per cent. Today's drop is the biggest since the 44-paise fall on January 27.
"Initiating the session on a weaker note today, rupee was seen continuing with its losses during the day against dollar. Slight recovery in dollar index, downbeat data from Germany and dollar demand in the local market were some of the factors leading to weakness in rupee," said Abhishek Goenka, Founder & CEO, India Forex Advisors.
Regional currencies like the Yen slid to its weakest levels this month amid reports that Bank of Japan said it will continue monetary easing to meet its inflation target.
Some analysts suggested that rupee's depreciation today was linked to fears that fiscal projections in interim budget may not be met.
"FY14 fiscal deficit was contained at 4.6 per cent of GDP. FY15 fiscal deficit is placed at 4.1 per cent. We see 50-100 bps upside risk to fiscal projections. Centre's net borrowing, at Rs 4919 billion, came in line with expectations. In our view, there are upside risks to government issuance," said a Bank of America Merrill Lynch report.
FIIs had injected USD 83.91 million yesterday as per Sebi data.
Forward dollar premiums declined on fresh export receipts.
The benchmark six-month forward dollar premium payable in July ended further down at 234-236 paise from 237-239 paise. Far forward contracts maturing in January also dropped to 479-481 paise from 482-484 paise previously.
The RBI fixed the reference rate for the dollar at 62.1220 and for the euro at 85.1680.
The rupee dropped further to 103.87 against the pound from 103.46 while it fell back slightly to 60.73 per 100 Japanese yen from 60.67.
However, the rupee strengthened further against the euro to 85.40 from 84.75.