The rupee depreciated by 5 paise to 81.95 against the US dollar in early trade on Thursday, as investors preferred to remain on the sidelines ahead of the RBI policy decision.

At the interbank foreign exchange, the domestic unit opened weak at 81.95 against the dollar, registering a decline of 5 paise over its last close. In initial trade, the local unit also saw a high of 81.88 against the greenback.

On Wednesday, the rupee gained 42 paise to close at 81.90 against the US dollar.

"Today, the RBI would release its monetary policy outcome, which will turn the eyeballs on the INR as markets have already factored in a 25-basis point rate hike by the RBI," CR Forex Advisors MD Amit Pabari said.

The RBI's rate-setting panel on Monday started its three-day meeting amid expectations that the central bank may go for a 25 basis point hike in benchmark interest rate, probably the last in the current monetary tightening cycle that began in May 2022.

Pabari further noted that Reserve Bank Governor Shaktikanta Das-headed Monetary Policy Committee would maintain its option to hike via continuing its 'withdrawal of accommodative' stance and holding on to its tightening policy.

"However, if the RBI Governor hints at a pause in interest rates going further or he surprises with a lesser rate hike in his speech it would hurt the local unit," he said.

Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, rose 0.16 per cent to 102.01.

Brent crude futures, the global oil benchmark, declined 0.92 per cent to USD 84.21 per barrel.

In the domestic equity market, the 30-share BSE Sensex was trading 89.46 points or 0.15 per cent lower at 59,599.85 points. The broader NSE Nifty declined 22.45 points or 0.13 per cent to 17,534.60 points.

Foreign Institutional Investors (FIIs) were net buyers in the capital markets on Wednesday as they purchased shares worth Rs 806.82 crore, according to exchange data.

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