Despite opening weak, the rupee recouped losses and provisionally closed 4 paise higher at 76.16 against the US dollar on Wednesday, supported by weakness in broad dollar index and recovery in domestic equities. However, investors are largely cautious about the impact on rupee amid the ongoing India-China border tensions, analysts said, adding that any further escalation can add to existing weakness. Foreign fund outflows and concerns over rising coronavirus cases are also weighing on investor sentiment, they added.
"Indian rupee traded in a small range while investors await any update on developments on skirmish that happened on the India-China border. Rupee has broken the past one and half month range of 75-76 and steadily heading towards all-time low of 76.91. Market participants are focusing on comments from diplomats on border issues, any escalation will lead to rupee weakness but if the conflict is diffused, quick gains can be seen," Devarsh Vakil, Deputy Head, Retail Research, HDFC Securities, said.
The rupee opened weak at 76.21 at the interbank forex market, but recovered the losses and settled higher by 4 paise over its last close. It had settled at 76.20 against the US dollar on Tuesday. During the four-hour trading session, the domestic unit witnessed an intra-day high of 76.10 and a low of 76.25.
"The geopolitical tension between India and China has brought back the risk-off mood in investors. We don't expect the dispute to escalate and both the sides will contain it, till then the market will remain skittish," Rahul Gupta, Head of Research-Currency, Emkay Global Financial Services, said.
"Any escalation or uncertainty will lead to a sharp bull-run in USD/INR spot. Until 76 level doesn't break in USD/INR spot, it will continue to remain afloat. The immediate support lies around 75.75, and resistance around 76.50," Gupta added.
The dollar index, which gauges the greenback's strength against a basket of six currencies, plunged 0.02 per cent to 96.93.
Commenting on the issue, Sugandha Sachdeva VP-Metals, Energy & Currency Research, Religare Broking, said, "Going forward, only a breach of 76.60 mark could steer it towards new record lows in coming days, else we expect the domestic currency to hold steady."
"The Indian rupee is poised at an important technical juncture at present and the India-China standoff may have some short-term repercussions on the rupee. In the near term, any extended standoff may see some depreciation in the INR, however, is unlikely that the rupee moves past the previous high of 77.60-77.90 zone. In the worst case scenario, some 1-1.25 per cent depreciation can be expected but not beyond this," Milan Vaishnav, Consulting Technical Analyst, Gemstone Equity Research, said.
From the technical perspective, any move higher than the previous highs will lack the internal strength as the rupee is facing persistent bearish divergence on the longer-term charts from the leading indicators and also important pattern resistances at those levels, Vaishnav added.
Meanwhile, Sensex ended down 97.30 points or 0.29 per cent at 33507.92, Nifty was down 32.85 points or 0.33 per cent at 9881.15.