The rupee depreciated 5 paise to settle at 83.49 (provisional) against the US dollar on Thursday due to foreign capital outflows and rising crude oil prices overseas.
Forex traders said a weak American currency and firm trend in the equity markets supported the local currency even as investors remained concerned ahead of the RBI's monetary policy decision to be announced on Friday.
At the interbank foreign exchange market, the local unit opened at 83.40 and touched the intra-day low of 83.50 against the greenback during the session.
The local unit finally settled at 83.49 (provisional) against the American currency, down 5 paise from its previous close.
On Wednesday, the rupee settled 7 paise higher at 83.44 against the dollar.
According to Anuj Choudhary, Research Analyst at Sharekhan by BNP Paribas, the rupee depreciated due to a surge in crude oil prices and selling pressure from FIIs (foreign institutional investors). However, a weak US dollar and positive tone in the domestic markets supported the rupee at lower levels.
"We expect the rupee to trade with a slight negative bias on worries over rising crude oil prices, and as FIIs continue to sell in the markets. However, positive tone in the domestic markets as NDA is expected to come back to power for the third consecutive term, raising optimism over policy continuity may support the rupee at lower levels," Choudhary said, adding that "USD-INR spot price is expected to trade in a range of Rs 83.20 to Rs 83.80".
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.03 per cent lower at 104.18.
Analysts attributed the weakness in the dollar index to a sharp fall in US Treasury yields after the latest data showed job growth in May was slower than estimated, raising expectations of an interest rate cut by the US Federal Reserve.
Market participants are likely to take further cues from the weekly employment data and trade balance numbers to be released later in the day. Besides, the decision of RBI's rate-setting panel is likely to impact investor sentiment, they added.
The Monetary Policy Committee (MPC) of RBI on Wednesday started its three-day deliberations to decide the next monetary policy. Reserve Bank Governor Shaktikanta Das will announce the outcome on Friday.
"The Reserve Bank of India is set to keep its repo rate at 6.5 per cent at its June 7 review. The policy is turning more restrictive as cooling inflation pushes up real rates, hurting growth," said Amit Goel, co-founder and Chief Global Strategist at Pace 360.
He further said the RBI's record dividend payment of Rs 2.1 lakh crore to the government for FY24 may alleviate concerns about the growth outlook.
Brent crude futures, the global oil benchmark, advanced 0.31 per cent to $78.65 per barrel.
On the domestic equity market, the 30-share BSE Sensex climbed 692.27 points, or 0.93 percent, to close at 75,074.51. The broader NSE Nifty rose 201.05 points or 0.89 percent to 22,821.40.
Foreign investors were net sellers of Indian equities on Wednesday as they offloaded shares worth Rs 5,656.26 crore on a net basis. FIIs bought shares worth Rs 21,012.72 crore and sold equities worth Rs 26,668.98 crore in the cash segment.
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