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The rupee on Wednesday recovered sharply by 21 paise to close at 65.21 against the US currency, ending its two-day slide on fresh bouts of dollar selling even as trade deficit widened alarmingly to three-year high.
Domestic currency market largely withstood initial wobble arising from disappointing trade data as export declined due to liquidity crunch faced by exporters after the GST rollout.
Falling crude oil prices helped the rupee tide over trade deficit scare that ballooned to three-year high of $14 billion due to twin impact of rising oil imports and falling exports.
The home currency had lost 48 paise to hit a one-month low against the greenback in the last two sessions on concerns over likely fiscal slippage following a sudden rise in crude prices and reversal of inflation expectations.
A swift crash in crude prices after IEA downgrading its demand forecast for both this year and next predominantly revived forex trading sentiment, a forex dealer commented.
The oil benchmark Brent was trading at $61.50, down 1.14 per cent in early Asian trade.
Meanwhile, the BSE-Sensex dropped 181 points to close at 32,760.44, while Nifty fell by over 68 points to 10,118.05.
Earlier in the day, rupee made a soft start at 65.43 against overnight close of 65.42 at the Interbank Foreign Exchange (forex) market on mild dollar demand from importers.
It oscillated in a narrow trading band in early part of the trade before staging a strong rebound.
Garnering strong momentum in late afternoon deal, the home currency hit an intra-day high of 65.15 before finishing at 65.21, showing a solid gain of 21 paise, or 0.32 per cent.
The RBI, meanwhile, fixed the reference rate for the dollar at 65.3689 and for the euro at 77.0634.
On the global front, the greenback continued to hover at three-week lows against other major currencies, pressured by a stronger euro as investors were eyeing an upcoming US inflation report due later in the day.
In cross-currency trades, the rupee declined further against the Pound sterling to settle at 85.79 from 85.72 per pound and continued to fall against the Euro to close at 77.21 from 76.69 earlier.
It also fell back against the Japanese yen to finish at 57.81 per 100 yens from 57.57 yesterday.
In forward market today, premium for dollar continued to slide due to sustained receiving from exporters.
The benchmark six-month premium payable in April moved down to 129-131 paise from 131.50-132.50 paise and the far forward October 2018 contract also drifted to 269-271 paise from 271.50-272.50 paise on Tuesday.