MUMBAI: The rupee slumped by 62 paise to close at 79.15 against the US dollar on Wednesday, marking its worst single-day fall in the current fiscal as widening trade deficit and US-China tensions dented the investor sentiment.
While foreign fund inflows and oil prices falling below USD 100 per barrel level lent some support to the local unit, renewed rate hike fears following hawkish comments of Fed officials pushed back the rupee to below 79 levels.
On Tuesday, the rupee rallied 53 paise, its best single-day gain in over 11 months, to close at an over one-month high of 78.53 against the US dollar.
At the interbank foreign exchange market, the local currency opened lower at 78.70 on Wednesday and fell further to the day's low of 79.21 as the dollar strengthened in the global markets. The rupee finally settled at 79.15 to a dollar, showing a loss of 62 paise which is the steepest single-day fall since March 7, 2022.
"Rupee traded very weak as the dollar index rose above USD 106 on the back of US China geopolitical issues with regards to Taiwan.
Also India's trade deficit widened to an all-time high. Sending signals on imbalance of trades guiding rupee weaker to dollar," said Jateen Trivedi, VP Research Analyst at LKP Securities.
According to Dilip Parmar, Research Analyst, HDFC Securities, the rupee underperformed among Asian currencies amid a record high trade deficit number and haven demand for the dollar as traders weigh risks associated with US-China tensions.
"Importers and central banks' might have bought the dollar in Wednesday's session. The dollar should probably stay supported around current levels as the US Fed pushback against the dovish interpretation of the July meeting," Parmar said.
Spot USD/INR is expected to trade higher in the coming days with resistance in the range of 79.30 to 79.60, while the recent bottom of 79.495 becomes the strong support, Parmar added.
The Indian rupee has erased all of the gains witnessed in the previous session to drift lower by 0.75% amid concerns about the swelling trade deficit on the domestic front, wherein it has surged to a record high of USD 31.02 billion in July as compared to USD 26.18 billion in June, Sugandha Sachdeva, Vice President - Commodity and Currency Research, Religare Broking Ltd said.
The strong advance witnessed in the Dollar Index from the key 105 mark owing to hawkish comments from a trio of Fed officials amid widespread inflationary pressures and rising friction between the US and China have again roiled the sentiments and raised the case for aggressive rate hikes by the US central bank ahead, Sachdeva said.
"Dismal macroeconomic data from India also put downside pressure on Rupee. India Services PMI declined to 55.5 in July from 59.2 in June while Composite PMI declined to 56.6 from 58.2 during the same period. India's trade deficit widened to a record of USD 31.02 billion in July compared to USD 26.18 billion in June," said Anuj Choudhary - Research Analyst at Sharekhan by BNP Paribas.
However, decline in crude oil prices and foreign fund inflows cushioned the downside. FIIs remained net buyers in the capital market on Tuesday as they purchased shares worth Rs 765 crore, as per exchange data. Brent crude futures, the global oil benchmark, fell 0.95 per cent to USD 99.58 per barrel.
Choudhary further said that the US Dollar gained on safe-haven appeal amid geopolitical tensions between the US and China on US Speaker Nancy Pelosi's Taiwan visit. The dollar index, which gauges the greenback's strength against a basket of six currencies, rose by 0.5 per cent to 106.77.
Traders may also remain cautious ahead of the Reserve Bank of India (RBI) monetary policy outcome towards the end of the week.
"USDINR spot price is expected to trade in a range of Rs 78.20 to Rs 79.80 in the next couple of sessions," Choudhary said.
On the domestic equity market front, the BSE Sensex ended 214.17 points or 0.37 per cent up at 58,350.53 points, while the broader NSE Nifty jumped 42.70 points or 0.25 per cent to 17,388.15.
India's exports dipped, though marginally, for the first time in 17 months in July, while the trade deficit tripled to a record USD 31 billion, fuelled by over a 70 per cent rise in crude oil imports.
The S&P Global India Services PMI Business Activity Index fell from 59.2 in June to 55.5 in July, pointing to the slowest rate of growth in four months. Meanwhile, the S&P Global India Composite PMI Output Index -- which measures combined services and manufacturing output -- fell from 58.2 in June to 56.6, highlighting the slowest increase since March.