The rupee fell for the second straight day as demand for dollars was expected to remain firm ahead of key US inflation data later in the day, and rising oil prices weighed on the domestic currency in addition to India's cooling inflation reading to below the upper end of the RBI's target band for the first time in eleven months.
Bloomberg showed the rupee was last trading at 82.6387 per dollar in early trade, compared to its previous close of 82.5388 when the Indian currency stalled a three-day winning streak.
PTI reported that the domestic currency fell 20 paise to 82.71 against the US dollar in early trade.
A rise in crude prices in the international market on supply concerns also did not help the rupee as the country depends on imports for over 85 per cent of its oil needs.
"Asian currencies were stable while Brent crude rose to $79 per barrel on supply constraints," said Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors.
"Accordingly, the USDINR pair was set to open a tad weaker at 82.66 as dollar demand for oil continued yesterday and is expected to remain between 82.30 to 82.90 for the day. The market awaits with bated breath for the US CPI data this evening as the Fed commences its two-day meeting," he added.
On Monday, data showed domestic retail inflation fell to an 11-month low of 5.88 per cent in November, below the upper end of RBI's target band of 2-6 per cent for the first time since December 2021.
Industrial output unexpectedly contracted 4 per cent in October, its weakest performance in 26 months.
The unexpected drop in industrial output and the lower-than-expected inflation reading for India could put additional pressure on the local currency.
The Indian inflation is negative for the rupee in the short term "on the margin" in that it probably makes it more likely that the RBI will deliver one more hike at the most, a trader at a Mumbai-based bank told Reuters.
The overnight risk for Wednesday and Thursday is "exceptionally high" for the rupee. The rupee could very well "be on the wrong side of 83," depending on how the US inflation data shapes up, added the trader.
The dollar held its ground on Tuesday as investors awaited the US inflation data and the conclusion of the year's final Federal Reserve meeting on Wednesday.
The inflation rate due to be released later today will put that presumption to the test, and the Fed's decision on Wednesday should give policymakers some pretty immediate reaction.
"A miss in either direction may get the markets to assume a follow-up reaction from the Fed," John Briggs, Head of Economics and Strategy at NatWest Markets, told Reuters.
On the assumption that inflation had peaked, a tiny surprise to the downside a month prior sparked a surge of bond buying and dollar selling.
"Event risks this week will thus ascertain whether 2023 starts with a focus on the inflation battle or fighting recession fears. The DXY (dollar index) is stuck in a tight range of 106-104 levels due to mixed economic data from the US last week," said Amit Pabari, Managing Director of CR Forex Advisors.
"A tug of war in DXY amid filling expectations and a miss in expectation of data can be seen as markets remain confused. Overall, the prospect of peaking US interest rates would be a dollar negative," he added.
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