Traders were on watch for any potential intervention from the Reserve Bank of India to defend the currency, as the renewed global risk aversion comes at a time of deep uncertainty about India's fiscal and economic outlooks.
The RBI disappointed domestic markets by keeping interest rates on hold on Monday, the same day when Fitch Ratings cut the country's outlook to "negative", becoming the second credit agency to threaten India's investment grade rating.
The focus has shifted to the government, which faces a daunting task of reviving faltering economic growth while ensuring its current account and budget deficits do not widen any further.
Analysts do not expect much action until the presidential elections on July 19, a largely ceremonial post, but one for which Finance Minister Pranab Mukerhjee is the ruling Congress Party's nominee.
"With the monsoon getting delayed and reforms likely to take a backseat till the Presidential elections are over, I think the pressure on rupee will come from domestic sources," said K.N. Dey, director at Basix Forex.
At 10:27 a.m., the rupee was at 56.44/45 to the dollar versus its 56.15/16 close on Wednesday. It fell to 56.49 in early trade, just above its record low of 56.52 hit on May 31. The rupee's fall reverses the mild gains against the dollar seen in June after a tough last month in which the currency hit a string of record lows.
The currency now remains vulnerable to any flare-ups of global risk aversion, while also subject to domestic challenges.
Fitch and S&P have highlighted the growing unease from investors about the lack of visible reform moves by the government despite a toxic macroeconomic cocktail of slowing growth and high inflation.
Reserve Bank of India Governor Duvvuri Subbarao this week said the central bank will continue to intervene in the currency markets to curb volatility, blaming the rupee's falls on both global and domestic factors.