The rupee Tuesday snapped its gains of previous two sessions and closed 10 paise lower at 71.07 to the US dollar amid fears of escalation in geopolitical tensions following Indian fighter jets' air strikes on Pakistan-based terror camps.
Besides, weakening investor sentiments in domestic equity market and rising global crude oil prices impacted the rupee movement.
Reacting to rising tensions between India and Pakistan, the domestic currency opened 30 paise lower at 71.27 in the early trade and further weakened to 71.35 as the day progressed. However, it recovered from early plunge to settle at 71.07, a loss of 10 paise against the dollar.
Similarly, growing geo-political tensions also hit investor sentiments in domestic equity markets, with benchmark Sensex diving 240 points to close at 35,974.
According to analysts, market movement is likely to be cautious until further clarity over cross border threat.
In a swift and precise air strike following the Pulwama attack, the Indian Air Force bombed and destroyed Jaish-e-Mohammed's biggest training camp in Pakistan early Tuesday, killing a "very large number" of terrorists, trainers and senior commanders.
The operation, described as a non-military, pre-emptive strike, was welcomed by the entire political spectrum and military experts who had been advocating retribution after the February 14 suicide attack on a CRPF convoy in Pulwama, killing 40 jawans.
Among other factors that put additional pressure on the rupee was rising prices of global crude oil, which is seen as a major cause for widening current account deficit.
Brent crude, the global benchmark, was trading 0.91 per cent higher at 65.50 a barrel on Tuesday.
"Rupee opened with sharp cut ...in the early morning trade amid rise in geopolitical tension with Pakistan after India's air strike on terror camps in Pakistan. The higher dollar demand from public and private firms through bond issuance also weighed on the Rupee...," V K Sharma, Head PCG and Capital Markets Strategy, HDFC Securities, said.
On Monday, the rupee firmed up by 17 paise to close at 70.97 against the US dollar in line with most Asian currencies amid hopes that the US and China will soon reach an agreement to settle their trade tariff issues.
The Financial Benchmark India Private Ltd (FBIL) set the reference rate for the rupee against the dollar at 71.0952 and against euro at 80.7471. The reference rate for the rupee against the British pound was fixed at 93.3594 and against per 100 Japanese yen at 64.16.
Foreign institutional investors (FIIs) bought equities worth a net Rs Rs 1,674.17 crore Tuesday, while domestic institutional investors sold shares to the tune of Rs 720.27 crore, provisional data showed.