The rupee weakened on Friday tracking choppy domestic shares and the euro's drop against the dollar, and is expected to move in a narrow band with most Asian markets closed for the Lunar New Year holiday.
At 11:10 am, the partially convertible rupee was at 45.6425/6500 per dollar, weaker than its 45.60/61 close on Thursday.
It is likely to move in 45.60-45.80 band intraday, dealers said, adding dollar sales from foreign funds would also weigh.
"Inflows have dried up as foreign investors are taking away money from India and other Asian markets to the US and Europe as the developed countries have started to recover," said a dealer at a foreign bank.
Euro will be the key driver for the rupee in the day as most Asian markets are closed.
The euro was on the defensive on Friday after European Central Bank President Jean-Claude Trichet dampened expectations for a near-term rise in euro zone interest rates.
The euro traded at $1.3633, after having fallen 1.2% the previous day, moving further away from a 12-week high of $1.3862 set on Wednesday.
"The euro has fallen below the psychological level of $1.3650, which is another negative for the rupee," said a private bank dealer.
Persistent dollar demand from oil importers is also expected to add to the rupee's weakness.
Indian shares fell 0.3% in early trade on Friday on lingering worries about surging inflation and interest rates in Asia's third-largest economy.
Foreign investors have pulled out $1.5 billion from Indian shares this year until February 2, following high inflation which may impact growth, and the escalation of violence in Egypt could hasten the withdrawal as risk aversion grips global investors.
"We think that regaining investor confidence will depend on how quickly inflation is brought under control, but at this point we are not overly concerned about the tail-risk event of the current account deficit not being financed by capital flows," Standard Chartered Bank said in a report.
India's central bank last month revised its inflation projection to 7% from 5.5% for March-end mainly due to persistent food price pressure.
India's wholesale price index (WPI) rose an annual 8.43% in December on higher food prices.
The dollar index, a measure of the greenback's performance against six major currencies, was up 0.02% at 77.760 points.
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 were at 45.8050, 45.8025, and 45.8050 respectively, with the total traded volume at $885 million.
