The Indian rupee was on the defensive on Thursday, pressured by a jump in oil prices and weakness in Asian peers even as likely central bank intervention kept the currency from testing record lows hit five months ago.
The rupee ended nearly flat at 96.78 per dollar, within striking distance of its all-time low of 96.96 hit in May.
Elevated oil prices, surging developed market bond yields and weak capital flows have battered the rupee this year, driving it down over 7% against the dollar - among the worst performances in the region.
While persistent Reserve Bank of India intervention has offered some relief to the market, traders do not yet see a case to be bullish on the rupee.
"The question now is whether the RBI will allow 97 to break and whether the market tries to push the unit closer to the 100 mark," an FX trader at a hedge fund said.
Investors say India's first rate hike in nearly four years is unlikely to slow or reverse record high capital outflows, leaving the central bank battling the vicious cycle of a weakening currency and rising inflation in a hostile global environment.
Global headwinds worsened again with Brent crude oil rising more than 4% to $104.3 per barrel on persistent worries about supply from the Middle East amid an increase in attacks on shipping in the Gulf and the Strait of Hormuz.
Asian currencies fell across the board while the dollar index lingered near it highest in more than one year after minutes from the Federal Reserve signalled policymakers viewed inflation as the biggest risk to their outlook.
"A hawkish Fed is firmly priced by money markets at this stage. After an expected 25bp hike to 4.25% in December, the market still looks for another 50bp of tightening next year. We think that is too aggressive, but doubt the market will want to fight against that hawkish pricing this year," ING said in a note.
