The rupee depreciated 9 paise to close at 75.72 against the US dollar on Wednesday due to growth concerns as a survey showed that the services sector contracted in April.
Weakness in Asian currencies following Chinese yuan dropping by 0.6 per cent against the US dollar and sustained foreign fund outflows also weighed on the rupee.
Inflation concerns following the Centre and some states increased taxes on petroleum products also hit investor sentiment.
The IHS Markit India Services Business Activity Index stood at 5.4 in April, a steep decline from 49.3 in March, and indicative of the most severe contraction in services output since records began in December 2005.
The Composite PMI Output Index, which measures combined services and manufacturing output, sank to 7.2 in April from 50.6 in March.
"The rupee came under pressure as sentiments took a beating post government's move of increasing a special tax on petrol and diesel to fill the fiscal gap," said Devarsh Vakil, Head Advisory, HDFC Securities.
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"India's composite and services PMI nosedived in April. This confirms that the GDP is set to contract significantly in the current quarter and could be the deepest plunge in output in decades," Vakil said.
The rupee opened weak at 75.77 at the interbank forex market but pared some losses to settle at 75.72, down 9 paise over its last close. It had settled at 75.63 against the US dollar on Tuesday.
"The risk tone has been tepid and will remain like that on renewed US-China spat. The trade war can reignite going ahead and prop up the safe-haven dollar demand.
"Also, coronavirus cases are increasing, stoking fears of the second wave of infection. Locally, there are concerns over macros, due to the extension in lockdown, India's GDP is expected to fall near 1 per cent. While the market is eagerly waiting for more stimulus measures from the government," said Rahul Gupta, Head of Research- Currency, Emkay Global Financial Services.
The death toll due to COVID-19 rose to 1,694 and the number of cases climbed to 49,391 in India on Wednesday, according to the health ministry.
Foreign institutional investors remained net sellers in the capital market, as they sold equity shares worth Rs 1,059.39 crore on Tuesday, according to provisional exchange data.
The dollar index, which gauges the greenback's strength against a basket of six currencies, rose by 0.40 per cent to 100.10.
Forex traders said the depreciation in the rupee was owing to weak Asian currencies which fell amid weaker Chinese yuan.
The Chinese yuan fell by 0.6 per cent after the currency resume trade after a long holiday. The US threats to impose tariffs in retaliation over the coronavirus outbreak weighed on the sentiment.
"Sentiments have also taken a beating amid weak PMI manufacturing numbers, underscoring the impact of coronavirus on the economy, where the overall trend in rupee looks skewed on the downside. The IIP numbers ahead are expected to be weak and are going to further worsen the rupee dollar equation," said Sugandha Sachdeva, VP-Metals, Energy & Currency Research, Religare Broking.
Sachdeva further said that "reopening of various economies in a phased manner has boosted risk appetite to some extent and is underpinning the rupee, where 77 mark is guarding it against further depreciation".
On the domestic equity market front, the 30-share index closed 232.24 points or 0.74 per cent higher at 31,685.75, while the NSE Nifty rose 65.30 points, or 0.71 per cent, to finish at 9,270.90.
International oil benchmark Brent crude futures were trading 1.61 per cent higher at USD 31.47 per barrel.
The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 75.5715 and for rupee/euro at 82.4626. The reference rate for rupee/British pound was fixed at 94.2170 and for rupee/100 Japanese yen at 70.84.