The rupee recovered sharply on Tuesday to below 79.50 per dollar, marking its largest gain in a year, after hitting a new all-time low by breaching the key psychological level 80-to-a-dollar in the previous session.
Reuters reported that the rupee notched its biggest one-day gain in a year on Tuesday against a wobbly dollar as local equities saw a rush of foreign investor inflows.
While the rupee had recouped some losses to end the previous session below the 80 per dollar mark as the Reserve Bank of India defended the Indian currency heavily once it breached that level, the Indian currency regained significantly on Tuesday, largely driven by a pull back in the dollar from two-decade peaks, with the greenback losing ground across against most major currencies.
Bloomberg quoted the rupee last at 79.4538 against the dollar, compared to 79.9675 in the previous session, during which the currency hit a record weak level of 80.1288.
PTI reported that the domestic currency gained 47 paise to close provisionally at 79.44 against the US dollar, a day after it breached the 80 per dollar level at the open in the previous session and hit its lifetime weak level of 80.15 on Monday.
August also marked the first month this year when overseas investors turned net buyers of India's government debt. On the day, yield on the 10-year paper dropped 6 basis points to 7.1893 per cent.
HSBC analysts became more optimistic about the rupee, citing a pullback in commodity prices and return of inflows supporting the currency, in addition to support from the country's central bank, showed a Reuters report.
"While we think the USD/INR pair can still rise further, we see scope for the rupee to outperform some other "deficit" peers temporarily," they wrote in a note.
The rupee's strength on Tuesday comes after the Reserve Bank of India (RBI) stepped in to prevent the currency from trading under 80 per dollar in the previous session, traders had told Reuters.
The dollar index losing steam ahead of US jobs data also lifted market sentiment.
Still, the risks that drive the dollar higher since Russia invaded Ukraine late in February are still at play and the risks are tilted more to the downside for the Indian currency.
"The Indian Rupee is down by 7 per cent YTD against the US dollar and is likely to scale further lower as Federal Reserve has proclaimed that the US monetary policy probably needs more tightening until inflation is under control. On the INR outlook, it seems the path of least resistance is on the downside," said Hitesh Jain, Lead Analyst – Institutional Equities at Yes Securities Capital.
"Having said that, USD/INR will likely inch towards the 81 mark but we do not see a major downside as RBI remains committed to preserving the INR in a confined range. Needless to mention, RBI's war chest in terms of adequate FX reserves to counter the volatility in INR. Also, FII flows into equities remain positive, while markets will derive courage from an imminent possibility of the inclusion of Indian Bonds in Global Indices," he added.
With the Federal Reserve determined to keep interest rates higher for longer, even as recession looms in the world's biggest economy, it could boost near-term volatility, analysts warned.
"Amid global turmoil and weakness in major Asian peers like the Japanese yen and the Chinese yuan, it will be interesting to see to what extent the RBI succeeds in protecting the USD/INR pair," said Amit Pabari, managing director at consultancy services provider CR Forex.