The rupee clawed back its lost territory to settle 13 paise higher at 71.53 to the dollar on renewed hopes about US-China trade deal.
The rupee went through bouts of volatility for a better part of the session as caution prevailed among participants ahead of Reserve Bank's policy meet outcome and also due to uncertainties around global trade deal. At the foreign exchange, the rupee opened weak at 71.76 against the dollar.
During the day, the domestic unit touched a high of 71.53 and a low of 71.81. The local unit finally settled for the day at 71.53 against the dollar, higher by 13 paise over its previous closing. The rupee on Tuesday had closed at 71.66 against the dollar.
Forex traders said market participants are hopeful that the Reserve Bank will go for another rate cut in the RBI policy meet on Thursday. Besides, the rupee also got support from foreign fund inflows in primary equity market.
The US and China are reportedly moving closer to phase-one trade deal despite tensions over Hong Kong and Xinjiang. "Rupee fell in the opening session against the US dollar but rose after reports showed that the US and China are said to move closer to a deal despite the heated rhetoric," said Gaurang Somaiyaa, Forex & Bullion Analyst, Motilal Oswal Financial Services Private.
Mr Somaiyaa further added that "market participants are awaiting for more clarity on the ongoing trade talks between the major two economies and flip-flop in statements is keeping the volatility high for the dollar. We expect the dollar-rupee (Spot) to quote in the range 71.70 and 72.20."
Traders also welcomed the Union Cabinet move that approved the launch of exchange traded fund (ETF) for bonds to create an additional source of funding for Central Public Sector Enterprises (CPSEs) and state-owned financial institutions.
"Bond market given thumbs up to FM Nirmala Sitharaman announcement of first debt exchange-traded fund (ETF) comprised of debt of state run companies, in a bid to allow retail investors to buy government debt," said V K Sharma, Head - PCG & Capital Market Strategy, HDFC Securities.
Traders said that investors are trading cautiously ahead of the RBI monetary policy outcome on Thursday. Bankers and experts believe the Reserve Bank may cut interest rates for the sixth straight time on December 5, to support growth that has continued to slip.
According to official data, GDP growth hit an over six-year low of 4.5 per cent in July-September 2019, dragged mainly by deceleration in manufacturing output and subdued farm sector activity. The RBI has cut interest rates on every single occasion the monetary policy committee (MPC) has met since Shaktikanta Das took over as the Governor in last December.
On the domestic equity market front, the 30-share BSE Sensex settled with gains of 174.84 points or 0.43 per cent at 40,850.29. The index swung between a high of 40,886.87 and a low of 40,475.83 during the day. The 50-scrip NSE Nifty closed 43.10 points or 0.36 per cent higher at 12,037.30.
Meanwhile, foreign institutional investors (FIIs) sold shares worth Rs 1,131.12 crore on Tuesday, according to provisional exchange data.
The dollar index, which gauges the greenback's strength against a basket of six currencies, was up 0.01 per cent at 97.74.
Crude oil benchmark, Brent Futures, rose 1.74 per cent to $61.88 per barrel. The 10-year government bond yield was at 6.47 per cent.