The dollar's strength against rivals overseas also weighed on the rupee while continued capital inflows kept the rupee fall under check to some extent, forex dealers said.
At the Interbank Foreign Exchange (Forex) market, the domestic unit commenced higher at 54.90 and immediately touched a high of 54.76 in line with early rally in local stocks as June inflation numbers showed an easing trend.
However, the positive trend was short-lived as the rupee reacted downwards and touched a low of 55.38 as dollar demand outstripped supply, putting the local currency under pressure.
Investors hopes of a rate cut by RBI were dashed as food inflation in June continued to rise in June, traders said.
The Indian stock market benchmark Sensex, which was up by over 68 points in early trade, fell back to end down by 110.39 points, extending the downtrend to four consecutive sessions.
FIIs, which bought stocks worth Rs 257 crore today as per provisional data, helped the the rupee settle at 55.31, a fall of 0.29 per cent or 16 paise from Friday's close of 55.15.
"The rupee reversed its initial strength primarily due to weakness in global currencies and rising inflation at consumer levels. The WPI, though better than expected, failed to enthuse the markets," said Pramit Brahmbhatt, CEO, Alpari Financial Services (India) said.
The US Treasury yield is still trading lower at 1.47 per cent reflecting persisting risk aversion in the global market, said Abhishek Goenka, Founder & CEO, India Forex Advisors.
The dollar index, consisting of six major rivals, was up by nearly 0.34 per cent in late Asian trade. (MORE)
