Rupee dropped to a more than one-month low of 54.2250 – its lowest since December 13 and weaker compared to its previous close of 54.69/70.
State-run Indian oil marketing companies can now raise diesel prices in line with increases in global crude oil prices, Oil Minister Veerappa Moily said on Thursday, a move that could help the government reduce its vast subsidy bill.
Traders said the move would also help contain the government's wide fiscal deficit, which is a positive for the rupee.
The euro rose to a 9-1/2 month high against the sterling on Thursday as worries about the poor UK economic outlook contrasted with better sentiment towards the single currency.
Dollar demand from oil firms is however prevalent and is likely to limit further losses, dealers say.