India imports more around 80% of its oil requirements and high global prices percolate through the economy and hurt consumers, while also widening the country's current account deficit.
Oil prices dropped to their lowest in two weeks after official figures showed a surprise jump in U.S. inventories of crude, and rising cases of COVID-19 in Europe, Russia, and some outbreaks of infections in China dented hopes for an economic recovery.
The partially convertible rupee was trading at 74.84/85 per dollar at 0748 GMT compared to its close of 75.0250 on Wednesday.
"Considering higher domestic inflation, as supply disruptions mount, it will not do any harm for RBI to lean with the wind and let rupee appreciate as it can lead to reduced imported inflation when metal and oil prices are rising, and clearing the liquidity overhang to some extent," Soumya Kanti Ghosh, group chief economist at State Bank of India wrote.
Traders said bond yields too dropped, tracking the fall in U.S. Treasury yields and oil prices with the 10-year expected to be rangebound between 6.25% and 6.40% in the absence of any major triggers.
The 10-year bond yield was trading at 6.33%, down 1 basis point on the day after having touched 6.31% earlier in the session.
The central bank late on Wednesday announced a 28-day variable rate reverse repo auction for 500 billion rupees on Nov. 2, a move some said is another step being taken towards liquidity normalisation efforts.
"The amount is not too large but the RBI is likely testing waters for now. We need to see how much demand is seen at this auction and what cut-offs are set. That will be the next trigger for markets," a senior trader at a private bank said.
(Reporting by Swati Bhat; Editing by Christina Fincher)
By Swati Bhat