The Indian rupee strengthened to a near three-week peak on Wednesday, supported by a rally in local stocks and traders trimming bearish positions ahead of the U.S. Federal Reserve's policy decision later in the day.
Traders also said that state-run banks sold dollars in short-lived bursts, blunting pressure from dollar demand related to the monthly futures expiry.
The rupee closed at 95.6475 per dollar, up 0.2% from Wednesday's closing level. The currency touched a peak of 95.49 earlier in the session, its strongest level since July 10.
Meanwhile, Brent crude jumped more than 3.5% to $87.1 per barrel, as Middle East tensions escalated following joint U.S.-Saudi strikes in Iraq and the interception of Iranian ballistic missiles aimed at U.S. forces in the region.
Brent has swung between $102 and $84 per barrel since Friday amid conflicting reports on the hostilities.
Against this backdrop of global volatility, the Federal Reserve will announce its monetary policy decision later in the day. Markets are pricing in a roughly 30% chance of a 25-basis-point hike.
Reflecting the uncertainty, near-term rupee volatility expectations rose, with the 1-month implied volatility gauge at 5.4%, near a two-week high.
"The (Fed) statement might acknowledge the upside risks to inflation posed by renewed geopolitical conflict, and there will likely be at least one dissent in favor of a hike," analysts at Goldman Sachs said in a note. They expect the U.S. central bank to keep rates unchanged on Wednesday.
Elsewhere, global shares struggled to push higher, as modest gains in Europe and the U.S. did little to calm investors after a punishing sell-off in Asia led by chipmakers.
India's limited exposure to the AI theme, though, proved a silver lining, with India's benchmark stock gauge climbing 1.1%, led by an over 2% rise in IT stocks that had previously been battered by AI disruption concerns.
