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The rupee's fall continued a day after India unveiled a surge in government spending despite expectations of an austerity budget to shore up its finances.
Fitch Ratings sovereign analyst Art Woo had told Reuters post-budget on Thursday that it would not impact India's sovereign ratings, though the country could find it challenging to meet its fiscal deficit target of 4.8 percent for the next fiscal year.
Traders, however, said there were rumors that Fitch was more than likely to downgrade India following Woo's interview to some local television channels earlier on Friday.
"The euro came down, there were some rumours regarding Fitch talking of an India downgrade -- these together led to triggering of several stops," said A Ajith Kumar, a senior foreign exchange dealer at Federal Bank.
"A close above 54.75 is not good news for the rupee. The next major level to watch out for is 55.20 on the upside," he added.
The partially convertible rupee ended at 54.90/91 per dollar, after hitting 54.9425, its lowest since January 9. The pair had ended at 54.36/37 on Thursday. The rupee dropped 1.3 percent on the week, matching its fall in the February 15 week, which was its biggest weekly drop in three months.
The UDS/INR pair hit a high of 54.73 in opening deals but quickly retreated. The 54.73 level was the 50 percent Fibonacci retracement of the decline from the high of 55.89 on November 26 to the low of 52.87 on February 6. The breach of that level, triggered a further stop-loss in the dollar, traders said.
Traders said sharp losses in the euro also hurt sentiment for the rupee.
The dollar index rose to its highest in six months on Friday, buoyed by the greenback's gains against the euro with the single currency hurt by poor economic data from Italy even as the US economy continued to show signs of improvement.
"The rupee is broadly moving in co-relation to the equity markets for now. I think the pair could head higher in the short run and the direction may change post-April," said Rajeev Mahrotri, head of forex and debt trading at IndusInd Bank.
"Commodities: gold and oil and the euro would be key things to watch for the ruepe. INR will not strengthen until gold comes off but the good news is that gold looks like it's headed further down," he added, predicting a range of 52.50 to 56.00 for the next three months.
Local shares, however, rose on Friday, rebounding from three-month lows as budget losses were seen to be overdone.
In the offshore non-deliverable forwards, the one-month contract was at 55.33 while the three-month was at 55.97.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and United Stock Exchange all closed at around 55.24 with a total volume of $7.06 billion.
