The Indian rupee fell 2 paise to settle at 95.76 (provisional) against the US dollar on Wednesday, as a sharp rise in global crude oil prices amid heightened tensions in West Asia kept markets on edge.

A paise is one-hundredth of a rupee, so the 2-paise decline represents a move of 0.02 rupee, implying a previous close of 95.74 against the US currency.

Why crude oil matters for the rupee

India imports the bulk of the crude oil it consumes — the world's third-largest consumer and importer of crude meets roughly 85% of its oil requirement through imports — which makes the rupee sensitive to swings in global oil prices. Crude is also India's largest import item by value, so a sharp rise in crude increases the country's oil import bill and, with it, demand for US dollars — a dynamic that has typically weighed on the Indian currency in such periods. A weaker rupee, in turn, raises the rupee cost of dollar-priced imports.

West Asia is a major source of India's crude imports, and heightened tensions in the region have in the past raised concerns over supply and shipping costs, which are reflected in global oil prices.

How the rupee trades

The rupee's exchange rate against the US dollar is determined in the interbank foreign exchange market, where participants also track the dollar's movement against major global currencies and overseas fund flows into and out of Indian markets. The Reserve Bank of India (RBI), the country's central bank, has in the past intervened in the currency market to curb excessive volatility in the rupee.

Source: CNBC-TV18 Markets