The Indian rupee is set to fall further from 13-month lows after soaring costs of oil imports boost demand for dollars, while capital outflows from the once red-hot stock market also weigh on the currency.

The rupee fell beyond 42.60 per dollar on Wednesday for the first time since mid-April last year losing 2.5 per cent this week and 7.6 per cent since the start of the year and bankers expect it drop past 43 per dollar soon.

'Nobody was expecting the rupee to fall so quickly and most of the exporters have sold their dollars earlier,' said Mizuho Corporate Bank treasury head Patrick Aranha.

The rupee hit a near decade-year high at just above 39 to the dollar in November on the back of heavy foreign buying of Indian stocks driven by buoyant growth in Asia's third-largest economy.

But mounting signs the economy was cooling down, including the weakest industrial output reading in six years out this week, dented foreign investors' appetite for Indian assets and they have sold a net $3 billion of stocks since the start of the year.

That is in a stark contrast to last year when foreigners invested a record net $17.4 billion in stocks.

Now the rupee is set for its steepest monthly decline in a decade and is Asia's worst-performing currency this year behind the Pakistani rupee and the Korean won.

Economists say with the dollar strengthening and investment and trade flows now working against the rupee, the near-term outlook was bleak.

'These factors are sufficiently strong to promote further weakness at least for the next quarter,' UBS economist Philip Wyatt said.

Analyst say the central bank also appears reluctant to tap its $312bn reserves to check the currency's fall the way it acted to stem its rapid rise last year when it jumped 12 per cent against the dollar.

Reserve Bank of India Governor Yaga Venugopal Reddy played down the rising trade and current account deficits saying they would be financed 'comfortably' by capital inflows.

The central bank has also indicated it would not seek to use currency gains to help it bring down inflation from its three-year peak of 7.6 per cent.

'That was basically a green light to buy the dollar/rupee,' said Standard Chartered Bank FX strategy head Callum Henderson, adding 42.18 had been a chart support for the rupee and a clear break there would see it head for 43.12.

Singapore's DBS Bank expects the rupee to hit 43-43.50 soon unless the stock market recovers and oil prices retreat from their all-time records near $127 per barrel.