The rupee recovered from early lows to settle higher by 6 paise at 68.79 against the US dollar on Wednesday amid uncertainty ahead of the outocme of US Federal Reserve meeting.
Forex traders said the rupee is trading in a narrow range as market participants are awaiting cues from the outcome of the Federal Open Market Committee (FOMC) meeting later on Wednesday.
At the interbank foreign exchange (forex), the domestic currency witnessed heavy volatility. The local unit opened lower at 68.89 a dollar and touched a low of 68.94 later.
The rupee made a recovery later in line with gains in equity markets and touched a day's high of 68.76 to US dollar.
The local unit finally closed at 68.79 against the American currency, registering a rise of 6 paise over its previous close of 68.85.
Traders said market participants were trading a cautious path as the US-China trade talks ended without a breakthrough.
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The 12th round of talks between top trade officials of the two countries ended without a breakthrough in Shanghai after US President Donald Trump's twitter tirade against Beijing.
"My team is negotiating with them now, but they always change the deal in the end to their benefit," Trump tweeted.
The rupee has risen by 24 paise or 0.34 per cent in July in its second month of gains.
"Rupee appreciated for second consecutive month amid strong foreign fund flow in debt market, foreign direct investment and stable crude oil prices," said V K Sharma, Head PCG & Capital Markets Strategy, HDFC Securities.
According to Sharma, India's bonds are headed for their best month since 2016, largely due to the probable rate cut by the RBI in the next meeting in August.
He further added that Budget announcement of shifting some borrowing offshore has been another reason behind rising bonds.
The 10-year government bond yield was at 6.37 per cent on Wednesday.
The Reserve Bank of India on Tuesday evening eased curbs on overseas commercial borrowing for companies and non-bank lenders. They will be allowed to raise foreign-currency debt with an average maturity of at least 10 years for working capital requirement, Sharma said.
The dollar index, which gauges the greenback's strength against a basket of six currencies, rose 0.03 per cent to 98.08.
Brent crude futures, the global oil benchmark, rose 0.63 per cent to trade at USD 65.13 per barrel.
Foreign institutional investors (FIIs) remained net sellers in the capital markets, pulling out Rs 1,497.07 crore on Wednesday, according to the provisional data.
Meanwhile, on the domestic market front, the 30-share BSE Sensex settled 83.88 points or 0.22 per cent higher at 37,481.12. The broader NSE Nifty ended 32.60 points or 0.29 per cent up at 11,118.00.
Meanwhile, Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee/dollar at 68.7500 and for rupee/euro at 76.5751. The reference rate for rupee/British pound was fixed at 83.5445 and for rupee/100 Japanese yen at 63.31.
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