The Indian rupee fell to a two-month low on Friday, posting its worst week in five months, as local shares slumped mirroring a global selloff, with the central bank's policy review next week to set the tone for the currency.
The rupee's fall was driven by steep losses in shares, as investors fled markets in Asia and Latin America, fearing the impact of a slower growth in China as highlighted by a weak factory activity report on Thursday, and expectations that the U.S. Federal Reserve will cut further its bond-buying stimulus at a policy meeting next week.
The local currency weakened ahead of the Reserve Bank of India's rate review on Tuesday, where it is expected to keep rates steady on easing inflation.
However, a recent central bank report suggesting that the RBI targets retail inflation has led to concerns that interest rates may remain high for an extended period of time.
Reserve Bank of India Governor Raghuram Rajan called inflation a "destructive disease" that was forcing the central bank to keep monetary policy tight, according to a report from news agency Press Trust of India on Thursday carried in the website of The Economic Times newspaper.
The comments led to added worries among investors about the direction of interest rates.
"I don't see RBI will do any rate cuts on Tuesday as it will consider the inflation rate based on CPI data, not on WPI," said Aanand Patankar, a senior option trader with SAK Forex Market Pvt Ltd.
The rupee weakened sharply in late trades as stop-losses got triggered with the central bank likely stepping in to stem losses, dealers said.
"RBI was seen controlling the rupee above 62.50 levels," said Patankar.
The partially convertible rupee closed at 62.66/67 per dollar compared with its close of 61.9275/9375 on Thursday.
It fell to a low of 62.73 during the session, a level last seen on Nov. 22. On the day, it fell 1.2 percent, its biggest fall since Nov. 11.
For the week, it was down 1.8 percent, its biggest fall since Aug. 30.
In the offshore non-deliverable forwards, the one-month contract was at 62.88 while the three-month was