The rupee today withstood the headwinds of CAD worries and a hawkish Federal Reserve rate hike to close higher by 3 paise at 67.62 against the US currency, cutting short its two-day decline.
Headwinds in the form of consistent widening of current account deficit (CAD), rising inflation worries accompanied by heavy portfolio outflows kept the forex market sentiment shaky.
The CAD jumped over three times to USD 48.7 billion, or 1.9 per cent of the GDP in FY2017-18 from USD 14.4 billion or 0.6 per cent in the previous year, according to an RBI report.
For the March quarter, CAD rose manifold to over USD 13 billion, or 1.9 per cent of GDP, from a low USD 2.6 billion, or 0.9 per cent, in the year-ago period, the RBI said.
The US Federal Reserve also delivered the widely expected rate hike overnight, with a hawkish statement and economic projections. The Federal Open Market Committee raised the rate by 0.25 bps to a range of 1.75-2.00 per cent.
Additionally, inflation based on wholesale prices shot up to a 14-month high of 4.43 per cent in May.
"RBI's report on CAD along with Fed's hawkish comments kept the Indian rupee under pressure. Fluctuating oil prices and FIIs continuing to give a cold shoulder to the equities also dampened the mood of the currency," Anand James, Chief Market Strategist at Geojit Financial Services said.
The bullish case for the rupee is that growth and inflation are on the rise and this is likely to lead to another rate hike in this year, possibly as soon as August, a forex dealer said.
Bond markets retreated after a brief recovery on growing concerns over a rate hike and the 10-year benchmark bond yield settled a tad higher at 7.94 per cent.
The rupee resumed higher at 67.56 from the last close of 67.65 at the interbank foreign exchange market on fresh selling of the greenback by banks and exporters.
It later strengthened to hit a high of 67.54 before slipping back.
The local unit turned lower in mid-afternoon deals due to some dollar demand from private banks, erasing early gains, but it managed to pull back towards the fag-end to end at 67.62, showing a small gain of 3 paise, or 0.04 per cent.
The RBI, meanwhile, fixed the reference rate for the dollar at 67.6875 and for the euro at 79.9254.
On the energy front, crude prices traded little changed. Brent crude futures were trading up at USD 76.78 a barrel in early Asian trade.
Domestic equities reversed a three-session winning run as cautious investors booked profits after the US Fed raised interest rates and struck a hawkish stance.
Foreign investors pulled out around Rs 1,372.84 crore from stocks today, provisional exchange data showed.
The dollar index, which measures the greenback's value against a basket of six major currencies, was up at 94.01.
In the cross-currency trade, the rupee retreated against the pound sterling to close at 90.79 per pound from 90.16 and dropped further against the euro to settle at 79.94 from 79.50 earlier.
It also fell back against the Japanese yen to end at 61.53 per 100 yens as compared to 61.19.
In forward market today, premium for dollar edged lower due to mild receiving from exporters.
The benchmark six-month forward premium payable in October eased to 106-108 paise from 107.75-109.75 paise and the far-forward April 2019 contract softened to 251-252 paise from 251.50-253.50 paise on Wednesday.