The rupee was only a touch weaker ahead of the Reserve Bank of India's policy decision on Wednesday as oil prices tumbled on concerns over the demand outlook after the domestic currency crashed to over a one-month low in the previous session, driven by a surge in the dollar.
Bloomberg showed the rupee was trading at 82.7213 per dollar, compared to 82.6162 in the previous session, the lowest in over a month.
"The Indian rupee was sold off yesterday as corporate demand drove it lower towards 82.60, a level last seen over a month ago," said Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors.
Corporate dollar outflows and the culling of long rupee positions were cited as reasons for the rupee's fall and the pickup in intraday volatility on Tuesday. But a fall in crude prices overnight helped the rupee somewhat on Wednesday as India imports over 85 per cent of its oil needs.
PTI reported that the domestic currency fell 25 paise to 82.75 against the US dollar in early trade.
While falling oil prices will undeniably help, the positive opening is "more of a reflection" of markets wanting to assess how sustainable the rupee's "unexpected" fall to well below 82 is, a trader at a Mumbai-based bank told Reuters.
Overnight, oil prices fell, with Brent crude futures declining below $80 per barrel. A nearly 4 per cent fall in Brent oil was caused by worries about how demand would develop in the face of uncertainties surrounding the global economic outlook.
"Brent oil was below $80 per barrel, relieving high inflation concerns. Still, Asian currencies were down as risk-off sentiment took the sheen off lower oil prices. The Chinese yuan, though, was still above 7.00 per dollar," said Finrex Treasury Advisors' Mr Bhansali.
"We have the RBI policy today with the central bank expected to raise by another 25-35 bps before possibly signalling a pause as inflation around the world falls. The rupee is expected to trade in a range of 82-83 with a close watch on the RBI and its words on future rates," he added.
Investors eye the RBI's policy decision and the details on its growth and inflation outlook to be announced on Wednesday, with the central bank widely expected to raise rates by a more modest 35 basis points.
The impact of the RBI policy decision is "pretty straightforward", the Mumbai-based trader told Reuters - a 35-basis point (bps) hike is priced in and will not have an impact, while a 25 bps increase will be very negative for the rupee in the current context.
Meanwhile, the dollar index - a measure of the greenback's performance against a basket of currencies, rose further on Wednesday as top US bank executives warned of an impending recession, risk appetite took a hit and boosted the US currency.
Top bankers from JPMorgan Chase, Bank of America, and Goldman Sachs warned that the banks are preparing for an economy that will worsen next year as inflation threatens consumer demand.
"We've been forecasting a recession in the US, the UK, the euro zone and Japan...It's part of our baseline," Joseph Capurso, Head of International and Sustainable Economics at Commonwealth Bank of Australia, told Reuters.
"(That) will provide more support to the US dollar as a safe-haven currency," he added.