The rupee inched closer to record low against the greenback on Thursday, as climbing oil prices eroded sentiment, while traders pointed to corporate demand for dollar and outflows on defence-related payments that weighed on the local currency.
The partially convertible rupee INR=IN fell to 81.88 per dollar, compared to its close of 81.52 on Tuesday. India's financial markets were shut on Wednesday for a holiday.
Outflows due to defence-related payments and oil importers bidding for dollars accelerated the rupee's slide, said Mumbai-based traders.
Speculative and importer demand for dollars on worries that the rupee could slide below 82 in the coming days added to the local's unit's troubles, said a different trader at a private bank.
Oil prices hovered near $94 per barrel after the producer club OPEC+ decided on output cuts. Oil has gained around $10/bbl since last week after worries over declining demand spurred losses. O/R
Any further rise in crude prices could be detrimental for the rupee as India is the third biggest oil importer in the world.
Meanwhile, the dollar index USD= rebounded from trading under 111 earlier in the session, while U.S. yields also crept higher toward 3.78%.
Dampening the mood further, J.P. Morgan late on Tuesday said Indian bonds would continue to be kept on the watchlist of a widely tracked emerging market index, potentially delaying the inclusion to next year.
Markets were hoping for the index operator to consider India's inclusion this year, which was estimated to bring in dollar inflows of around $30 billion.
J.P. Morgan's decision comes at a time when the rupee is being squeezed by a large trade deficit and volatility in portfolio flows.
The local unit has dropped to just shy of 82-per-dollar multiple times in recent sessions, which, traders said, likely prompted the Reserve Bank of India to step in and arrest.
Traders now reckon that the rupee's new range is probably between 81 and 82, with higher risk of a fall below 82.