The rupee dived to its lowest level ever on Monday as investors sought refuge in the dollar after factory output data pointed to a further slowdown in Asia's third-largest economy.
Traders said further falls were likely after the partially convertible rupee fell 1.53 percent to close at 52.84/85 to the dollar, its biggest one-day loss since November 21.
The currency, which hit a record low of 52.87 during the session, could hit 54 to the dollar within days, traders said.
"I can't see a single positive factor for the rupee except for support from the Reserve Bank of India, which is also likely to be limited in the absence of depth of foreign exchange reserves and already-tight rupee liquidity," said Moses Harding, head of asset-liablility committee at IndusInd Bank.
"So we could see rupee move to 54 mark pretty soon," said Harding who also heads market and economic research at IndusInd.
The Reserve Bank of India (RBI) has said that it will intervene only to smoothen volatility, and not to target specific levels.
But data released by the RBI earlier in the day showed it had sold dollars for the second consecutive month in October, but the unit remains the worst performer among major Asian currencies this year.
India's foreign exchange reserves stood at $306.844 billion on December 2, according to the central bank data last Friday. By comparison, China's reserves stand at about $3.2 trillion.
"Our growth story is going down," said N.S. Venkatesh, treasurer of IDBI Bank. "Equities are weak and foreign investors are looking to pull out money. The picture in the euro zone too is bleak. A combination of this is hitting the currency hard."
"On top of this, oil importers are also driving up the dollar demand. But I think (monetary authorities) will be able to hold the rupee near 53," he said.
Subir Gokarn, a deputy governor of the RBI, said on December 3 the RBI would use all available tools to stem a fall in the rupee if the currency's downward spiral escalated and would take steps to keep liquidity at comfortable levels.
Foreign funds have withdrawn a net $147.83 million from local equities so far this year after investing $29 billion in 2010, according Securities and Exchange Board of India data.
The Bombay Stock Exchange slipped 2.12 percent to a two-week low on Monday after a sharper-than-expected fall in October industrial output added to concerns about the slowing economy.
Industrial output fell 5.1 percent in October, far more than the median forecast for a 0.5 percent drop in Reuters poll.
One-month offshore non-deliverable forward contracts were quoted at 53.24, indicating more short-term weakness in the onshore spot rate.
The one-month onshore forward dollar premium was at 33.25 points compared with 31.00 on Friday, while the three-month was at 75 points, down from 77.25. The one-year premium was at 216.50, down from 226.25.
In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX, and the United Stock Exchange, ended at 53.0025, 53.0125 and 53.0225, respectively. Total volume was $5.58 billion.