Recovering from a two-month low of 60.51, the rupee snapped two-day losses to close 12 paise higher at 60.04 against the dollar after the RBI sold the American dollars and its Governor assured the markets of better preparedness to deal with external shocks.
The rising tension in Iran led to a sharp rise in crude oil prices hurting the rupee which slipped to 60 levels on Monday. Higher oil prices can impact fiscal and trade deficits thereby impacting the economy.
Markets and rupee may weaken further as Iraq shut down its biggest oil refinery on Tuesday. Sentiments may dampen for the oil importing countries like India which gets it second highest oil imports from Iraq.
On Tuesday, the domestic unit opened weaker at 60.36 to the dollar on continued concerns about rising oil prices. It declined to 60.51 during the day after which the RBI is likely to have sold dollars.
This aided the rupee as it strengthened to 59.95 at the Interbank Foreign Exchange market.
Foreign banks also sold dollars on behalf of exporters, which supported the rupee.
Further, the RBI governor Raghuram Rajan pepped up the investors saying the country is watching the Iraq situation, but is better prepared to deal with any external shocks.
"We have sufficient reserves…the current account deficit is low. So, I think one shouldn't worry too much about the external side at this point," Rajan said on the sidelines of an SBI conclave.
Intraday, the rupee moved in a broad range of 56 paise from 59.95 to 60.51.
Market investors will also watch for the reports on the monsoon and the Union Budget due to be tabled next month.
Call and Bonds
The overnight call money rate (the rate at which banks borrow money from each other to overcome short-term liquidity mismatches) ended lower at 8 per cent from the previous close of 8.75 per cent. It moved in a wide range of 7 per cent to 8.90 per cent.
The 8.83 per cent benchmark bond maturing in 2023 rose to Rs 101.47 from Rs 101.14, while its yield softened to 8.59 per cent from its previous close of 8.64 per cent. Bond prices and yields move in opposite directions.