"Rupee weakness is due to two factors: fundamentals driven by higher oil prices and the pressure on the balance of payments and the rising yields in the West. Both act as potential sore points for the rupee," says Madan Sabnavis, chief economist of CARE Ratings. The recent run of solid US economic in contrast with a softer turn in European data has also lifted the US dollar to its highest for the year so far against the euro. The dollar also reached its highest since December against a basket of currencies. A firming US dollar has also been negative for some commodities like gold.

Global crude prices hit their highest in more than three years as global supplies remained tight and the market awaited news from Washington on possible new US sanctions against Iran. US President Donald Trump has set a May 12 deadline for Europeans to "fix" the deal with Iran over its nuclear program or he would refuse to extend US sanctions relief for the oil-producing country. Brent crude futures added 31 cents to $75.18 a barrel.

The Reserve Bank of India (RBI) last week announced purchase of sovereign bonds via open market operation (OMO). The RBI said it will buy Rs 10,000 crore of government bonds on May 17. "The RBI announced an OMO purchase on Friday which is mainly intended to sterilize the rupee liquidity taken out of the system due to forex intervention. However it could lift sentiment in rates market temporarily," says forex advisory firm IFA Global.

Mr Sabnavis of CARE Ratings expects the rupee to remain volatile in the near future. "While oil may settle down in a month or so, the US interest rates will continue to remain high until such time that the US Federal Reserve does something decisively. We can expect volatility until such time RBI intervenes in the market at what it thinks would be the right rate," he said.