US Treasury yields jumped to multi-year peaks on Wednesday, with the 10-year yield reaching a seven-year high after Wednesday's robust data bolstered the case for the Fed to raise interest rates again in December and beyond.
The rupee crashed below 73 against the dollar on Wednesday, falling by 43 paise. On Tuesday, markets were closed on account of Gandhi Jayanti. As such, short-term move in oil prices remain triggers for a move in the rupee, it added.
An expected rate hike would be the Reserve Bank of India's (RBI) third this year, after it lifted borrowing costs in June and August. Indian bond yields spiked as prices fell.
"Expectations are building for an aggressive rate response, but the policy committee's inflation mandate and the current benign trend, backs the case for a measured 25 bps rate hike", Radhika Rao, an economist at DBS wrote in a note on Thursday.
Analyst see an upside to crude prices, given a tightening of the global oil market amid an expected reduction in oil exports from Iran due to United States sanctions, persistent decline in Venezuelan production, and a slowdown of growth in U.S. output due to mid-stream bottlenecks.
It comes just one day before the Indian central bank is expected to raise rates on Friday to prop-up the rupee.
"Indian rupee plunged to a fresh record low of 73.77 against the stronger USA dollar during the early morning trade", a market analyst said.
So far this year, the rupee has declined 12.07% and foreign investors have sold $2.01 billion and $7.11 billion in the equity and debt markets, respectively.