The rupee dropped sharply against the dollar on Wednesday, ahead of the US Federal Reserve meeting, as investors remained cautious and waited for guidance from Fed chairman Jerome Powell for near-term direction.
PTI reported that the Indian currency fell 12 paise to close provisionally at 79.90 against the US dollar.
At the interbank foreign exchange market, the local currency opened at 79.83 and finally ended at 79.91, down 13 paise over its previous close of 79.78 against the American currency, PTI said.
Bloomberg showed the rupee was last changing hands at 79.9000 against the greenback, after trading in the range of 79.8187 to 79.9125 in the session, down about 13 paise from Tuesday's close of 79.7667.
"The Indian rupee depreciated on overall strength in the dollar and concerns over global economic recovery. The IMF cut India's FY23 GDP forecast to 7.4 per cent from 8.2 per cent in its previous estimate, which also weighed on the rupee," Anuj Choudhary - Research Analyst at Sharekhan by BNP Paribas, told PTI.
Mr Choudhary further said renewed outflows by FIIs also put pressure on the rupee. However, the positive tone in the domestic equities cushioned the downside.
"The rupee is expected to trade on a mixed to negative note on strong Dollar and expectations of an aggressive rate hike by US Federal Reserve," he said, adding there are broad market expectations of a rate hike of 75 bps. A surprise 100 bps rate hike may lead dollar higher and put pressure on riskier assets," he added.
According to the latest exchange data, foreign institutional investors continued to be net sellers on Tuesday in the capital market, selling shares worth Rs 1,548.29 crore.
That despite the dollar retreating further from its recent 20-year highs ahead of the Fed policy meeting, where the bank is anticipated to hike rates by an additional 75 basis points in order to rein in spiralling inflation.
But moves in currency markets were modest as traders await the policy announcement at 1800 GMT.
The Fed is expected to raise interest rates by 75 basis points (bps), with a possible increase to 100 bps. By year's end, traders anticipate the Fed will increase the rate to 3.4 percent in an effort to get inflation back on track.
With the dollar already up 2.3 percent in July, bets on excessive rate hikes helped lift the dollar index to its highest level in almost 20 years earlier this month at 109.29.
"Markets are taking a bit off the table before tonight's Fed meeting," Simon Harvey, head of FX analysis at Monex Europe, told Reuters.
"Barring any imminent headlines on European energy or political developments I think we will see very limited ranges," he added.