The rupee fell to a record low while bond yields surged on Monday, exacerbating fears about the funding of the current account deficit and sending policy makers scrambling to find quick fix solutions beyond sporadic interventions.
The Reserve Bank of India was due to meet with officials from oil companies, the biggest buyers of dollars in domestic markets, to discuss their currency needs, two sources with direct knowledge of the matter said.
Dealers said the RBI, which intervened to defend the currency during the session, could mandate that refiners buy dollars via a separate window and not in currency markets, a measure that would help ease pressure on the rupee.
Meanwhile, Prime Minister Manmohan Singh will meet industry leaders on July 29 to discuss the rupee, while Finance Minister Palaniappan Chidambaram was due to travel to the United States from Monday in a previously scheduled trip to drum up foreign direct investment, especially in infrastructure.
Efforts to contain the rupee's slide highlight the vulnerability of a country dependent on capital inflows to fund a current account deficit that hit a record high of 4.8 per cent in the fiscal year ended in March.
"Weakening rupee, along with rising oil, is not good news for India," said Shubhada Rao, chief economist at Yes Bank in Mumbai.
"As such, rupee will come under continued pressure. We expect policymakers to take more administrative steps to bring some stability to the currency market."
The rupee closed at 60.61/62 after earlier hitting a record low of 61.21, breaching a previous all-time low of 60.76 on June 26. It had closed at 60.225/235 on Friday.
The falls were sparked as U.S. jobs data on Friday cemented bets the Federal Reserve will wind down its quantitative easing, while a a spike in oil prices that sent Brent crude futures to a more than three-month high further aggravated concerns about India's current account deficit.
The Indian rupee has weakened 9.3 per cent this year, the worst fall in emerging Asia. The weaker currency is sparking foreign sales of bonds and stocks, which in turn is further pressuring the rupee.
Bonds fell to a two-month low with foreign investors having sold more than $7 billion in debt since May 22.
The 10-year yield ended up 7 basis points at 7.57 per cent from its previous close, after earlier rising to as much as 7.63 per cent, its highest since May 9.
The expected market volatility led the Fixed Income Money Market and Derivatives Association of India to remove trading bands for the day, a measure it also adopted when the rupee was last plumbing record lows late last month.
The 5-year overnight indexed year surged as much as 15 bps to 7.69 per cent, a two-year high, before closing up 6 bps on the day at 7.60 per cent.
The 1-year rate ended up 5 bps at 7.55 per cent, further widening the gap between the two after the spread between the two rates turned positive on Friday for the first time in two years, normalising the disinverted rate curve.
The RBI was seen intervening in both the morning and afternoon sessions to defend the rupee. Yet traders said the central bank would need stronger action to have a longer-lasting impact on the currency.
Among measures beyond those targeting oil companies, the RBI could curb speculative positions by imposing limits on intraday or overnight net open position limits, they said.
Meanwhile, the government could review limits for foreign investment in sectors such as defence or issue a sovereign bond to non-resident Indians, dealers said.