The rupee fell on Thursday from the three-week highs hit in the previous session on caution ahead of the Federal Reserve meeting and as oil firms and the government were seen stepping up their dollar purchases.

Many investors are hopeful the Federal Reserve will unveil a new “QE3” asset purchase programme when it announces its policy decision at 22:00 IST (1630 GMT), an event that could hit the dollar and boost risk currencies.

Traders are also eyeing a special government cabinet meeting later in the day in which a hike in heavily subsidised fuel prices may be discussed, while the regular weekly cabinet on Friday is due to discuss opening up the aviation sector for foreign direct investment.

Policy reforms are seen as critical to avoid credit downgrades that would push India into sub-investment ratings, and would help the government stick to its fiscal targets.

The partially convertible rupee closed at 55.43/44 per dollar from its close of 55.21/22 on Wednesday and off the three-week high of 55.14 in the previous session.

Traders said some large state-run banks were major buyers of dollars in the market, with traders saying they believed the government was behind the trades as it sought to make payments towards defence purchases.