MUMBAI—The Indian rupee continued its freefall Wednesday, with a range of aggressive central bank measures and suspected largescale interventions in the currency markets doing little to stem the slide.
The rupee sank to an all-time low against the U.S. dollar, with the greenback touching INR54.46. The rupee's previous record low was 54.2925 to the dollar, struck on Dec. 15, 2011.
India is caught in a vicious cycle of rising fuel import costs because of a weak rupee, which swells its fiscal and current account deficits.
This in turn hurts investor confidence and prompts outflows during times of global risk aversion, further denting the currency.
Also, while foreign fund inflows have taken a beating of late because of falling investor confidence in India, overseas reasons are to blame for the rupee's slide as well.
The dollar is gaining around the world with the political crisis in Greece taking centerstage and the risk of the country pulling out of the euro zone inciting a move toward the safe-haven greenback.
The RBI will take more steps to curb the rupee's volatility, Reserve Bank of India Deputy Governor H.R. Khan told reporters on the sidelines of a conference in Nepal, without elaborating.
But the question now is what the Reserve Bank of India and the government can do to support the rupee.
Not very much, say analysts and traders.
"I don't think they have too many options left now," said A.V. Rajwade, a risk consultant who has served on two influential RBI committees on capital account convertibility.
A gap between the demand and supply of foreign exchange in India is weighing on the rupee, he said.
The RBI is suspected to have been in the foreign exchange market several times recently, but analysts say its room to intervene is limited by India's dwindling foreign exchange reserves.
"The RBI will need to be cautious in using its $294 billion of reserves," Capital Economics said in a recent research note.
The reserves are thin, given that India ran up a trade deficit of $185 billion in the last fiscal year that ended March 31.
After gaining as much as 9% against the dollar earlier in the year, the rupee has been hit by a wave of capital outflows in recent weeks.
Jitters over proposed changes to India's laws to crack down on tax avoidance have spooked foreign investors already concerned about India's widening current account and fiscal deficits, stubbornly high inflation and slowing growth.
The rupee's drop -- it has fallen more than 2% so far this year after sliding 16% in 2011 -- beyond the psychologically important level of 54 to the dollar comes despite a series of strong moves by the central bank.
Apart from the interventions, the RBI -- in its most aggressive move yet -- last week forced exporters to sell half their foreign currency holdings within two weeks from May 10.
The government's recent move to postpone the implementation of the new tax laws to the next fiscal year starting April 1, 2013, has done little to soothe foreign investors.
So far, most of the efforts to protect the rupee have come from the Reserve Bank of India, rather than the government.
The central bank could offer a special dollar window to state-owned crude oil importers, Standard Chartered Bank STAN.LN -0.92% said in a research note. The move would isolate a key source of dollar demand from the market.
The RBI could also seek to prevent bets against the rupee by lowering the open interest limit for currency futures and introduce special deposit schemes to draw in non-resident Indians.
--Prasanta Sahu in Pokhara, Nepal, contributed to this report
