At 10:05 hours (IST), the rupee traded at 74.55 per US dollar, down 0.3% from the previous close of 74.3100.
Crude oil prices surged to a multi-year high on Monday after the Organization of the Petroleum Exporting Countries and its allies said the body would adhere to its plan of just 400,000 barrels per day output till the end of the year.
The projected increase in supply from the OPEC falls short of expectations, especially at a time when the global economy is showing signs of recovery from the Covid-19 crisis.
Brent crude futures for December delivery on the ICE Futures exchange rose 2.5% to close at $81.26 per barrel, the highest level since October 2018. Meanwhile futures for November delivery on the New York Mercantile Exchange shot up to a seven-year high of $77.62 per barrel, up 2.3% from the previous close.
Elevated oil prices do not bode well for India as the country is a major importer of the commodity. Not only do high oil prices exert upward pressure on the inflation trajectory but also worsen the outlook for the current account.
These fears dragged the domestic currency to a low of 74.6350 to a dollar on Tuesday.
The rupee has already taken quite a beating over the last month, shedding more than 2% against the US dollar as an earlier-than-expected timeline for monetary policy normalization from the Federal Reserve has sent the greenback surging to a one-year high.
Some currency traders were, however of the view that the rupee would depreciate past the 74.60 to a dollar level as the Reserve Bank of India is expected to step in the spot market to smoothen out volatility and curb a free-fall in the domestic currency.
The surge in oil prices complicates matters for the central which is scheduled to detail its next monetary policy statement on Friday.
While headline retail inflation has been easing for the past couple of months, a rise of such a magnitude in international oil prices will undoubtedly compel RBI to step up its vigilance on consumer prices.
Government bonds also suffered, with yield on the 10-year benchmark 6.10%, 2031 paper climbing 3 basis points to 6.28% as the volatility in the global oil market intensified concerns about RBI signalling a tighter monetary policy at its statement on Friday.
Bond prices and yields move inversely.
Even before the recent surge in crude prices, speculation was rife that the central bank could announce an increase in the reverse repo rate, which currently represents the overnight cost of funds for money markets.
For the day, yield on the 2031 paper is not seen climbing past the psychologically significant 6.30% mark as RBI will likely step in to the market to prevent a sharp rise in sovereign borrowing costs.