The rupee fell due to oil-related dollar demand on Monday, ending 2012 with its second consecutive yearly fall, weighed down by a wide current account gap, the slow pace of financial reforms, and economic uncertainty at home and abroad.
However, the rupee ended the year with an improved tone, recovering some 4.2 per cent from the record low of 57.32 touched in June, when investor confidence in the economy and the government were at their weakest.
Data released just as the market closed showed the country's current account deficit widened to an all-time high of 5.4 per cent of GDP in the July-September quarter as export growth slowed more sharply than growth in imports, dragging the balance of payments into the red once again.
While challenges remain, investors are hopeful of a mild recovery in 2013, as the Reserve Bank of India is widely expected to start cutting interest rates as early as January, helping the economy recover after growth fell below 6 per cent in 2012.
"2013 should be a good year for Indian markets, including the rupee," said Ashtosh Raina, head of foreign exchange trading at HDFC BankBSE 0.18 %.
"We may see some rate cuts to spur growth and some improvement in the global sentiment which would help," he added.
The partially convertible rupee closed at 54.99/55.00 per dollar versus its previous close of 54.7550/7650.
For the year, the rupee fell 3.5 per cent, although that was only a fraction of its 19.1 per cent decline in 2011.
Traders said the rupee was wedged in a tight range for most of Monday as custodian banks and exporters continued to sell dollars to offset the demand from oil refiners looking to meet month-end demand, but dollar short-covering in late trade hurt.
The fate of the "US fiscal cliff" talks will drive sentiment in global markets this week, with the US Congress scheduled to meet later on Monday.
Looking ahead to the new year, the immediate trigger for the markets in 2013 will be whether the central bank delivers a rate cut at its Jan. 29 policy meet after shifting its focus towards managing growth from inflation.
Investors will also be looking at whether the government sticks to its reform drive after announcing a slew of fiscal and economic measures in September, well into the year.
India is also facing the prospect of a sovereign ratings downgrade from Fitch and Standard & Poor's, making its 2013/14 budget to be announced in February a key factor, given worries of a surge in spending ahead of general elections in 2014.
"I expect the rupee to be at 52.50 by end-March and head towards 54 by end 2013," said Vikas Babu Chittiprolu, a senior foreign exchange dealer with state-run Andhra BankBSE 0.30 %.
"I expect the budget to be a pro-reforms budget which would pave the way for a populist budget next year. I also expect inflows to continue which will help the rupee," he added.
In the offshore non-deliverable forwards, the one-month contract was at 55.36 while the 3-month was at 55.90.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 55.19 with a total traded volume of $3.22 billion.