The rupee plunged by 44 paise to close at a 20-month low on Wednesday as consistent foreign fund outflows and risk-averse sentiments weighed on the local unit.

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Growing concerns over the Omicron variant of coronavirus after the WHO warned of high transmissibility risks of the new strain hit the appeal of riskier assets.

The rupee has been under pressure for the past five weeks due to consistent forex outflows on expectations of faster rate of tapering by the US Federal Reserve to rein in rising inflation. 

The local unit has declined in nine out of 11 trading sessions this month, tanking a total 119 paise or 1.58 per cent against the dollar.

At the interbank foreign exchange market, the rupee breached the 76 level in opening session to trade lower at 76.05 a dollar on foreign fund outflows.

The rupee plunged further to settle at 76.32, a level not seen since April 24, 2020, showing a loss of 44 paise over the previous close. Also, the rupee recorded its sharpest single-day decline in nearly eight months.

Traders said the decline in the rupee has also been driven by the fear of the rapid spread of the Omicron variant.

"Rupee depreciated further and fell below 76 level today following dollar demand and risk-averse sentiments. So far this month, nine out of 11 trading sessions, rupee depreciated following policy divergence between RBI and US Fed, along with foreign fund outflows from domestic equities," Dilip Parmar, Research Analyst, HDFC Securities, said.

The rupee weakened due to higher trade deficit number and surge in wholesale price index based inflation, Parmar said.

There is some modest weakness in the dollar index ahead of FOMC decision later tonight. However, dollar bulls remain largely in control of proceedings over the long run with dollar index holding above psychological level of 96, he added.

The US dollar index, which measures the greenback's strength against the basket of six currencies, fell 0.12 per cent to 96.45.

Sugandha Sachdeva, Vice President - Commodity and Currency Research, Religare Broking Ltd said that the rupee breached the 76 mark amid a hawkish tilt from the US Fed and expectations of a faster wind-down of asset purchases while the Omicron coronavirus virus scare has also hurt the risk appetite in the market.

The Fed seems to be concerned about reining in high inflation over the impact of the Omicron variant now, which is boosting the appeal of the safe-haven dollar.

"Inflation in the US is running at a multi-decade high, and rising price pressures are likely to continue in 2022 as well, which coupled with a low pace of hiring has raised the bets for an earlier-than-expected rate hike. This could spur capital outflows from emerging markets like India and weigh on the local unit," Sachdeva said.
The Fed is likely to wrap up the taper process by March 2022, and follow through with its rate hike cycle by April or May. Besides, the recent rebound in crude oil prices has paved the way for the rupee to weaken towards 76.60 in the near-term, Sachdeva added.

According to Sriram Iyer, Senior Research Analyst at Reliance Securities, the rupee depreciated against the US dollar amid increasing bets that the US Federal Reserve could accelerate the pace of policy normalisation and signal more rate hikes for next year.

On the domestic equity market front, the BSE Sensex ended 329.06 points or 0.57 per cent lower at 57,788.03, while the broader NSE Nifty declined 103.50 points or 0.6 per cent to 17,221.40.

Foreign institutional investors remained net sellers in the capital markets, pulling out Rs 763.18 crore on Tuesday, as per provisional data.

Brent crude futures, the global oil benchmark, fell 1.06 per cent to USD 72.92 per barrel.