MUMBAI: The rupee fell 16 paise to close at 96.32 (provisional) against the US dollar on Wednesday, weighed down by heightened tensions in West Asia and a rise in global crude oil prices.
However, positive sentiments in the domestic equity markets and a weaker greenback prevented a sharper decline in the local unit, forex traders said.
At the interbank foreign exchange market, the rupee opened at 96.12 and traded in the range of 96.04-96.32 during the session. It settled at 96.32 (provisional), down 16 paise from its previous close.
The rupee depreciated 48 paise to close at 96.16 against the US dollar on Tuesday.
The US military reimposed a naval blockade on Iran and intensified its airstrike campaign early on Wednesday, hitting an Iranian army barracks and killing at least seven troops while wounding 260 people across the country.
Days of retaliatory strikes across West Asia by Iran and the US, and both nations' attempts to assert control over the Strait of Hormuz, threaten to push the region back to an all-out war.
"Elevated oil prices continue to limit the rupee's upside by increasing India's import bill and demand for US dollars. Options market pricing still reflects bearish sentiment toward the rupee, indicating that traders remain concerned about geopolitical risks and the possibility of renewed pressure if oil prices rise further," Anil Kumar Bhansali, Head of Treasury and Executive Director, Finrex Treasury Advisors LLP, said.
The rupee is expected to stay in the range of 95.80 to 96.50 in the near term with inflows taking it higher towards 95 levels in the coming days, he added.
Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading at 100.78, down 0.14 per cent.
Brent crude, the global oil benchmark, rose by 0.47 per cent to USD 85.13 per barrel in futures trade.
On the domestic equity market front, Sensex rose 130.49 points, or 0.17 per cent, to 77,185.43, while Nifty was up 26.45 points, or 0.11 per cent, to 24,078.50.
Foreign Institutional Investors on Tuesday offloaded equities worth Rs 739.69 crore in the domestic equity market, according to exchange data.
On the domestic macroeconomic front, wholesale price inflation shot up to 9.87 per cent in June, from 9.68 per cent in May, led by a sharp spike in prices of food and non-food items.
Net direct tax collection grew 16.40 per cent to over Rs 6.51 lakh crore till July 13 this fiscal year, driven by higher corporate tax mop-up, government data showed on Tuesday.