The Indian rupee tumbled to an all-time low against the dollar Tuesday as jitters about the economy were compounded by fear that the central bank's largely hands-off approach to the currency leaves it more room to fall.
The currency has been Asia's worst performer against the dollar this year, down more than 17%.
The rupee has been plagued by a combination of a lower risk appetite among global investors, spooked by the European debt crisis, and pessimism about the Indian economy. Growth expectations for the year ending March 31 are now at around 7% to 7.5%, compared with earlier government targets of 9% to 9.5%. And India continues to suffer from an inflation rate of around 10%, despite a 20-month campaign of interest-rate increases by the central bank.
With foreign investors staying away, the flow of dollars into the country has dried up in recent months. Foreign institutions have put a net $4.48 billion into Indian bonds and stocks this year, compared with $39.06 billion over the same period last year.
Increasingly concerned about a further fall in the currency, importers in recent days have started accumulating dollars, in turn weakening the rupee.
On Tuesday, Reserve Bank Deputy Governor Subir Gokarn said that while the bank doesn't have a target, it does view the rupee's sharp depreciation as a problem, since it could fuel inflation.
Finance Minister Pranab Mukherjee played down the effect that central-bank intervention could have, saying it might be different if local factors rather than global uncertainties were the main drivers of the rupee's decline. "Unless the international situation improves, there is a risk," he told reporters.
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