The rupee fell to its weakest level in more than a month on Tuesday but held above 96 per dollar as likely central bank intervention limited losses driven by surging oil prices and bets on a US rate hike this week.
The rupee settled at 95.9550 per dollar, down 0.4 per cent on the day, its biggest one-day fall since mid-July.
Brent crude rose more than 2 per cent to $108.20 a barrel, raising concerns about a wider Indian trade deficit and higher inflation.
Data on Tuesday showed that India’s goods trade deficit was narrower than anticipated in August, largely on account of a drop in gold imports, at $26.8 billion against economist
expectations of about $32 billion.
Meanwhile, signs of broadening inflation have prompted traders to add to wagers on a rate hike by the Reserve Bank of India next month.
Both Citi and Deutsche Bankbrought forward rate hikes calls from December to October.
This also weighed on government bonds with the benchmark 10-year bond yield climbing to its highest since mid-May.
Stocks were under pressure as well with the benchmark Nifty 50 index ending lower by about 1 per cent.
“A gradual broadening of price pressures is likely to keep inflation readings above 5 per cent in second half of the fiscal year, underscoring the need for a tighter (monetary) policy bias,” Radhika Rao, senior economist at DBS said in a note.
She expects the goods trade deficit to remain around $30 billion as stronger exports are offset by a further widening in the energy import bill.
In addition to oil prices, focus is also on the US Federal Reserve’s policy decision on Wednesday with markets pricing a 93 per cent chance of a hike. The Bank of Japan is also expected to raise rates on Friday.