The Indian rupee inched lower on Friday on worries foreigners would be deterred by political uncertainty, but losses were capped as a 1.8 percent rise in the stock market gave dealers confidence to build some positions.
The rupee ended at 41.0825/0925 per dollar, easing from Thursday's 41.04/06. It hit a nine-year high of 40.20 last month, but has since weakened amid waning risk appetite for emerging market assets.
A stalemate between the government and its communist allies over a nuclear energy deal with the United States could result in fresh elections if it cannot be resolved. India's biggest communist party said on Thursday it did not want to pull the government down over the deal, but added that this depended on the pact not being pursued.
"The political situation is looming large, and there is a concern that foreign investors will not bring in more funds in the short term," said the chief dealer with a foreign bank.
The combination of politics and turmoil in global markets has seen foreigners sell $2.4 billion of Indian equities this month, cutting their net purchases for 2007 to less than $8 billion. Traders fear prolonged uncertainty could accelerate the withdrawal of foreign funds from Asia's third-largest economy, putting pressure on the rupee. Dollar purchases by an oil refiner also weighed on Friday, dealers said. Oil is India's largest import.