The dollar supply due to the Presidents Day holiday in the United States on Monday added to this drop. Strong dollar demand from a large state-run bank, likely to meet the needs of its oil refining clients, also pulled down the rupee.
The rupee has been largely stable even after the U.S. Federal Reserve started tapering its bond buying programme, having cut it to $65 billion a month.
India's large fiscal and current account deficits have been a sore point for foreign investors and rating agencies. It has also been a key reason for the rupee's fall to record lows last summer.
The government took steps to shore up foreign reserves by raising $34 billion via two concessional swap facilities and bringing down the current account deficit through higher taxes on gold imports.
INR continues to remain shockingly stable and is trading with a bullish bias, thought this cannot be disentangled from the weak-USD macro environment enough to say that it is on account of Indian-bullish factors, says an analyst.
"Technically speaking, we are heading towards 61.50 as the next USD/INR downside target."
The partially convertible rupee closed at 62.20/21 per dollar versus its close at 61.84/85 on Monday. It fell 0.58 percent, its biggest daily fall since January 27.Indian bond and currency markets will be shut on Wednesday for a chatrapathi shivaji day.
In the offshore non-deliverable forwards, the one-month contract was at 62.52, while the three-month was at 63.39.