The decline was limited by a sluggish dollar overseas and sustained capital inflows, a forex dealer said.
The local currency opened higher at 61.90 a dollar from the previous close of 62.07 and logged a high of 61.76 as local stocks made initial gains.
The rupee then dropped, in line with stocks, to a low of 62.52 before ending at 62.51, a fall of 44 paise or 0.71%. In the previous two days, it had risen by 68 paise to a one-week high.
"It started weakening due to dollar buying by banks and corporates. Month-end buying of dollars and short covering was seen putting pressure on the rupee," said Abhishek Goenka, CEO of India Forex Advisors. Finance minister P Chidambaram said on Friday the right level for the rupee is 59-60, as per the real effective exchange rate, and it shouldn't overshoot that level.
Chidambaram also said the finance ministry supports the idea of treating bank credit to exporters as priority sector lending and is talking to the Reserve Bank about it.
Dollar index, a gauge of six major global rivals, was down by 0.20%. "The trading range for the USD-INR pair for the week is expected to be within 61.50 to 62.80," said Pramit Brahmbhatt, CEO of Alpari Financial Services (India).
RBI governor Raghuram Rajan said in Frankfurt that there is still some inflation in India, even after stripping out the effects of food and energy.
Asked about the RBI's policy stance, Rajan said, "At this point we are neutral, we will see how things develop."