MUMBAI: The Indian rupee hit a record low against the dollar on Wednesday, succumbing to the steep risk aversion hitting global markets and highlighting the vulnerabilities of a country facing challenging fiscal and economic outlooks.
Despite repeated interventions over the past sessions and a rash of other measures targeting deposits and exporters, the Reserve Bank of India has so far been unable to prevent the falls in the domestic currency.
The central bank will continue to face a losing battle, analysts say, unless global risk aversion eases or India resolves long-standing problems such as a widening current account deficit, both of which are seen as unlikely.
Frequent interventions would also further sap rupee liquidity at a time when the country is facing a severe cash crunch in its banking system, analysts added.
“Unfortunately for the rupee, this is not a great environment to run a current account deficit and thus be reliant on capital inflows from foreign lenders,” said Sean Callow, a senior currency strategist at Westpac Banking Corp in Sydney.
“Suspect only radical steps by RBI—or sudden action by foreign central banks and/or G20—will stop a push through 55 and quite possible higher,” he added, referring to the USD/INR cross.
The rupee fell to as low as 54.36 to the dollar, breaching its previous record low of 54.30 set in December. It was last trading at 54.335/35 compared to its 53.79 close on Tuesday.
The currency will hover near record lows against the dollar for the next month or so, a Reuters poll on Tuesday showed, though the analysts expect a gradual recovery.
The rupee has fallen nearly 10 per cent since its 2012 peak in February due to concerns about India's current account and fiscal deficits.
A poorly received federal budget for fiscal 2013 unveiled in mid-March has further eroded confidence by casting doubt on the government's willingness to implement policy reforms ahead of general elections due by 2014.
The rupee was further undermined by controversial government proposals for taxes on foreign investment.
However, analysts said one positive was slumping oil prices, which could help bridge India's current account deficit.
