Slowdown in inflows also weighed on rupee that ended 22 paise lower while the dollar index was trading almost stable against its six major global rivals ahead of the release of the minutes of a key US Federal Reserve meeting.
At the Interbank Foreign Exchange (Forex) market, the local currency commenced lower at 61.80 a dollar from previous close of 61.74 and immediately touched a high of 61.7850.
However, dollar demand pulled down the rupee as it fell back sharply to a low of 61.9950.
It settled at 8-1/2-month low of 61.96, logging a drop of 22 paise or 0.36 per cent.
This was its weakest closing since finishing at 62.04 on March 3, 2014. It had also logged intra-day low of 62.15 on March 4, 2014.
"Crude oil prices had fallen in the initial half of the day and prompted oil companies to speed up their greenback purchases also hurt sentiments.
Furthermore, a fall in local stocks triggered concerns of foreign fund outflows that also weighed on rupee," said Suresh Nair, Director, Admisi Forex India.
The rupee has weakened by 45 paise in five straight days.
In the stock market, the benchmark S&P BSE Sensex today tumbled by 130.44 points, or 0.46 per cent, after touching intra-day all-time peak of 28,294.01.
FPIs/FIIs bought shares worth USD 2.44 million yesterday, as per Sebi data.
Pramit Brahmbhatt, CEO, Veracity Group, said: "Trading range for the spot rupee is expected to be within 61.60 to 62.40."
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