A wider domestic monthly trade deficit and a contraction in exports for the first time in two years also weighed on the rupee.
The local currency closed at 81.31 to the dollar as against 81.10 on Tuesday. So far in 2022, the rupee has depreciated 8.6 per cent against the greenback.
Polish authorities said early on Wednesday that a missile made in Russia had killed two people. The incident led to fears of the war between Russia and Ukraine spilling over into other parts of Europe, especially as Poland is a member of the North Atlantic Treaty Organisation (NATO).
The resultant erosion of risk appetite prompted global investors to flock to the safety of the dollar, exerting pressure on emerging market currencies such as the rupee.
The dollar index touched a high of 106.78 during Indian trading hours on Wednesday. The index had settled at 106.40 the previous day, Bloomberg data showed.
As trade progressed, however, the rupee regained a fair bit of ground from its intraday low of 81.57 per dollar, as reports emerged that the missile strike in Poland had not been conducted by Russia.
“The Indian rupee opened at 81.40 as the Poland attack news brought about increased tensions and the dollar index moved up to 106.66. However, news confirming that the missiles were not deployed by Russia brought about relief,” Finrex Treasury Advisors head of treasury Anil Kumar Bhansali said.
“The geo-Political concerns have been causing huge volatility in the markets as prior to the missile firing the rupee was at 80.80 levels. Good opportunity for exporters who could not sell earlier,” he said, providing a range of 80.70-81.60 per dollar for the rupee in the coming days.
The view on the rupee was also clouded by official data released Tuesday which showed that India’s trade deficit was at $26.91 billion in October versus $25.71 billion a month ago. Exports declined 17 per cent in October, marking the first contraction in two years, the data showed.
“India’s widening current account deficit implies that the gap between investment and savings will widen, implying greater reliance on foreign savings to bridge the gap. Hence depreciation pressures on INR should prevail, with USD-INR expected to rise to 85 by March 2023,” Gaura Sengupta, economist, IDFC First Bank wrote.