The rupee reversed losses from earlier in the session on Wednesday to gain against a resilient dollar after the Reserve Bank of India hiked rates for the fifth consecutive time and said inflation was still elevated.
Bloomberg showed the rupee was last changing hands at 82.5150 per dollar after hitting the day's low of 82.7725, compared to its previous close of 82.6162, the lowest in over a month.
PTI reported that the domestic currency rose 3 paise to close provisionally at 82.47 against the US dollar as easing crude oil prices supported the rupee.
In the commodities market, Brent crude futures dropped 0.6 per cent to $78.86 per barrel after falling below $80 for the second time in 2022 during the previous trading session.
"The rupee consolidated at 82.50 after RBI hiked rates by 35 bps today and remained hawkish in its commentary with the market now expecting another 50 bps before calling a pause on rate increases," said Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors.
The RBI hiked its key lending rate by a more modest 35 basis points to 6.25 per cent after three consecutive 50-bps (basis points) increases to manage price pressures that have remained persistently above the upper end of its target band.
"The Indian rupee is expected to remain between 82-83 for the remaining part of the week. The RBI said it would control volatility but not the direction and also said forward premiums have fallen due to cash shortage and have started recovering from today," said Finrex Treasury Advisors' Mr Bhansali.
According to RBI Deputy Governor Michael Patra, once dollar flows restart, the Indian rupee forward premiums would increase from their current decade-low levels.
"What it (low premiums) is telling us is that there is cash (dollar) shortage, but that is now getting alleviated," Mr Patra said when asked by Reuters about the impact of the fall in premiums on the spot market.
"If you see forward premiums have started to correct today. So flows are coming back," said Mr Patra at a press conference after the central bank raised its key repo rate.
RBI Governor Shaktikanta Das stressed that it was important to make an objective assessment of the movement of the rupee in the context of global and domestic macroeconomic and financial market developments.
Mr Das said in the wake of appreciating dollar, the movement of rupee has remained least disruptive as compared to its peers, and the size of foreign exchange reserve is comfortable.
"The story of the rupee has been one of India's resilience and stability," the Governor said while pointing out that the appreciation of the US dollar this year, which precipitated large-scale depreciation of all major global currencies including the Indian rupee, has drawn wide attention.
In response to the gloomier economic picture, longer-dated bonds and the dollar extended their gains on Wednesday, while oil reversed some of the gains from earlier in the session after a steep decline on Tuesday.
The dollar index, a gauge of the greenback's performance versus a basket of currencies, rose on Wednesday as senior bank executives in the US warned of an imminent recession, weighing on risk appetite and pushing the US currency to strengthen.
Leading bankers from JPMorgan Chase, Bank of America, and Goldman Sachs cautioned that while the banks are preparing for a worsening economy next year due to inflation endangering consumer demand, this is not the case.
"We've been forecasting a recession in the US, the UK, the euro zone and Japan...It's part of our baseline," Joseph Capurso, Head of International and Sustainable Economics at Commonwealth Bank of Australia, told Reuters.
"(That) will provide more support to the US dollar as a safe-haven currency," he added.