MUMBAI - The Indian rupee reversed gains to close lower on Thursday as oil importers bidding for dollars were a drag on the local currency toward the end of the session.
The partially convertible rupee fell to 79.6350 against the dollar, having strengthened to 79.22. The unit had closed at 79.52 on Wednesday.
After days of weakness, crude prices were up more than 1% on Thursday after the International Energy Agency raised its oil demand growth forecast for this year as soaring natural gas prices drive some consumers to switch to oil.
That prompted oil importers in India to seek dollars through state-run banks and their bidding pushed the rupee lower, a trader at a private bank said, adding that soft U.S. inflation print overnight had solidified expectations of rupee gaining at the open.
The dollar index, which measures the currency against six majors, slid 0.2% as investors scaled back bets of an aggressive rate hike by the U.S. Federal Reserve.
Markets now look to India's retail inflation data due on Friday, as it will determine the local central bank's decision on interest rates next month right on the heels of a Fed meeting.
Inflation is likely to have eased in July owing to a fall in food and fuel prices yet stayed above the Reserve Bank of India's upper tolerance limit for a seventh consecutive month, a Reuters poll found.
The slowdown in the U.S. annual inflation rate should ideally help the recent revival in foreign equity inflows, boosting the rupee. Indian stocks on the day tracked an overnight rally on Wall Street to jump 0.7%.
However, investors remained cautious about gains in the currency due to inflation concerns at home and expressed worry of the rupee testing the 79.64 level.
Although, the rupee closed below that level, chances of it slipping past 80 per dollar next week are very high, unless the Fed comments on softening inflation, the trader added.
(Reporting by Anushka Trivedi in Mumbai; Editing by Anil D'Silva)