The rupee touched the symbolically significant level of 56 to the dollar as concerns about the euro zone prompt global risk aversion and expose country's domestic vulnerabilities, most prominently a widening current account deficit and sluggish policy reforms.
The rupee has now fallen more than 5 per cent this year against the dollar to make it the worst-performing Asian currency monitored daily by Reuters. It has dropped more than 13 per cent from its 2012 high reached in February.
Currency traders say the slide in the rupee in recent sessions has been made easier by a cautious Reserve Bank of India, the central bank, which has refrained from heavy dollar selling.
"If there is global risk aversion, how can the RBI defend the currency? The conditions prevailing are such that the fall in the rupee is justified," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
However, inaction carries dangers of its own, traders said, because it would deepen an impression of a RBI that is unwilling to take action. It does have measures to hand, such as selling dollars to oil importers, they said.
Still, it is important for the RBI to intervene in the market from time to time to be able to stem any steep fall, C. Rangarajan, the chairman of the prime minister's economic advisory council, told television channel.
"Sometimes markets always have a tendency to overshoot. I think if the impression goes that it will not intervene at all, it will have an adverse impact," Rangarajan said.
The drop on Wednesday to 56 per dollar marked the sixth consecutive day that the currency had hit a record low. The RBI's intervention, which dealers described as mild, was the first since Thursday.
The currency was weighed down by relentless dollar demand from oil importers and other companies.
Traders are looking ahead to an RBI board meeting scheduled for Thursday in Mussoorie, although the RBI tends not to make major announcements following such meetings.
The central bank has taken several measures to stem the rupee's slide, including raising deposit rates for non-resident Indians and forcing exporters to convert half of their foreign currency holdings into rupees, but none has had any notable impact.
The RBI has shied away from action that traders believe would make a significant difference, including most immediately selling dollars directly to oil importers.
Nomura argues such a move would reduce market dollar demand by $8.8 billion per month, or the average monthly value of petroleum and crude imports in the last fiscal year.
However, such a move would expose the RBI to greater market risk and erode its already diminishing stockpile of dollars.
Some observers expressed sympathy with the RBI's position, given stronger actions carry their own risks.
"There are costs associated with each response and these in any case will only be stop-gap measures that won't address the underlying macro imbalances including the unsustainably large CA (current account) deficit," CLSA economist Rajeev Malik wrote in a recent note.
(Source- http://economictimes.indiatimes.com)
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