The rupee was near its record low on Thursday as traders took to the sidelines ahead of the Reserve Bank of India's monetary policy decision.
The partially convertible rupee eased 0.4% to 79.4650 per dollar, having tumbled to 79.8075 earlier in the day, its lowest level in a week. It hit a record low of 80.065 against the dollar on July 19.
The rupee's weekly volatility jumped to its highest in nearly five months as a lack of guidance on rate increase by the RBI kept traders guessing.
The monetary policy committee will announce its decision on Friday, with a hike seen anywhere between 35 to 50 basis points.
In the derivatives market, USD/INR 80 and 79.75 strike call options that expire on Friday witnessed sizeable increases in open interest, suggesting traders were hedging against sharp decline in rupee post the RBI policy decision.
The currency has been in a free fall following a report on late Tuesday that India's provisional trade deficit for July widened to a record $31.02 billion from $10.63 billion a year earlier as imports again outpaced exports.
The rupee is done appreciating and is very likely to trade near 80 to 81 against the dollar in the near term due to inflation worries and the U.S. Federal Reserve's monetary policy tightening, a trader at a private bank said.
Meanwhile, a Reuters poll of FX strategists showed the unit was expected to trade near its historic low in the coming three months due to outflows and concerns about funding the current account deficit.
Indian equities also reacted to the rupee's woes as they sat out a broader rally in Asian stocks by snapping a six-day winning run. (Reporting by Anushka Trivedi; Editing by Anil D'Silva)