The rupee dropped by 27 paise to close at 71.62 against the US currency on Thursday, ending its two-day winning run due to month-end dollar demand from oil importers and growth concerns ahead of the release of GDP data on Friday.
Fresh trade concerns after China said it was ready to take firm counter-measures against the US which passed a law supporting Hong Kong protestors also weighed on the domestic currency.
Foreign fund inflows, weak crude prices, and losses in the dollar against global currencies capped the rupee losses.
At the interbank foreign exchange market, the local currency opened on a positive note at 71.33 but lost ground during the day to touch a low of 71.67. It finally settled at 71.62, lower by 27 paise against its previous close.
On Wednesday, the domestic unit had closed at 71.35 against the US dollar.
Forex traders said the domestic unit was trading in a narrow range as investors are awaiting clarity on the US-China trade deal front.
US President Donald Trump signed a law that voiced support for the pro-democracy protests in Hong Kong. Traders fear that the move could derail the trade talks between the two major economies.
"India's rupee snapped a two-day gain amid month-end dollar demand seen from importers ahead of the release of GDP number. The market is already pricing the 4.5 percent growth in the June-September quarter, the least since the Q1, 2013," said V K Sharma, Head PCG & Capital Markets Strategy, HDFC securities.
"Asian emerging market currencies traded mostly lower after US President Trump signed a bill backing Hong Kong protesters, spurring threat of retaliation from China and raising concerns about the prospect for an interim trade deal," Sharma said.
The second-quarter GDP number is scheduled to be announced on Friday. India's economy grew at 5 percent in the first quarter of 2019-20 -- the slowest pace in over six years.
According to Rushabh Maru, Research Analyst - Currency and Commodity, Anand Rathi Shares and Stock Brokers "the near term outlook of the rupee depends upon the outcome of the trade talks between the US and China.
"As the US continued to interfere in the Hong Kong issue, there are concerns whether the deal will happen or not. If the trade talks fail then the US will go ahead with tariffs on Chinese goods from December 15. There is also a threat of Yuan devaluation if the trade talks fail," Maru said adding that the outcome of the trade talks will determine the direction of the rupee.
Meanwhile, the 10-year government bond yield was at 6.46 percent on Thursday.
Brent crude, the global oil benchmark, fell 0.25 percent to USD 63.90 per barrel in futures trade.
On the domestic market front, market benchmark indices ended at fresh closing highs on Thursday following gains in index-heavyweights ICICI Bank and RIL, which became the first Indian film to breach the Rs 10-lakh crore market valuation mark.
After touching its lifetime high of 41,163.79 during the day, the 30-share Sensex rose by 109.56 points or 0.27 percent to end at a fresh closing peak of 41,130.17. The broader NSE Nifty closed at a record high of 12,151.15, up by 50.45 points or 0.42 percent over the previous close.
Foreign investors purchased equities worth Rs 1,000 crore on Thursday, according to provisional exchange data.
The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 71.3627 and for rupee/euro at 78.5632. The reference rate for rupee/British pound was fixed at 91.6711 and for rupee/100 Japanese yen at 65.37.
