The rupee hit a record low on Tuesday, with the absence of RBI intervention prompting importers to rush to cover future dollar needs, while exporters refrained from selling dollars in expectation that the rupee could fall further.
The rupee has plunged 2.8 per cent so far this week, notching record lows for two consecutive days.
Some analysts believed pressure on the currency intensified after comments on the limitations of currency intervention by Reserve Bank of India Governor Duvvuri Subbarao on Friday.
“Irresponsible comments by policymakers are suggesting there may not be intervention or that intervention may fail,” said Samir Lodha, managing director at QuantArt Market Solutions.
“Fundamentally, INR will continue to depreciate because of CAD (current account deficit), but this move has happened too soon and too fast.”
Subbarao said a failed defence of rupee can be worse than no defence, and reiterated that the central bank intervenes in the market only to manage volatility.
Analysts noted that while foreign institutional investors (FIIS) were still net buyers, the risk that they could turn sellers could force the central bank to intervene to at least moderate the volatility.
“The market is in a panic mode. Currently FIIs are still net buyers but if they turn sellers in coming days, in that case only hope will be RBI intervention for stability and with decent reserves, RBI can definitely stabilise volatility,” Lodha said.
The weakness in the rupee has prompted investors to exit their positions in the debt market while the domestic equity market is also under selling pressure.
Traders said a drop in other Asian currencies also hurt sentiment for the rupee.
At 10:15 a.m., the partially convertible rupee was at 58.66/67 per dollar, after hitting a life low of 58.7050 and 0.85 per cent weaker than its previous close of 58.15/16 on Monday.
The rupee has dropped in 16 of the last 18 trading sessions and is down 8.3 per cent since the start of May. The currency is the third-worst performer in Asia in 2013.
Traders will be watchful of any central bank intervention to prevent the rupee from weakening further. An absence of intervention by the central bank could push the rupee down to 59 later in the session, dealers said.
“Any respite for the INR from some possible bunched up FII debt and FDI inflows this month will be temporary,” said Rajeev Malik, senior economist at CLSA in Singapore.
“Barring volatility, the INR will eventually weaken to cross INR60/USD in a sustained manner. Admittedly, this is playing out sooner than we expected because of the earlier change in the global backdrop,” he added.