Rupee hits this year's low, at 53.44 against $

The rupee hit this year’s record low of 53.42 against the dollar on Thursday on the back of increased demand for the Greenback by the importers.

India’s fiscal and current account deficit and the prevailing high rate of inflation were the main structural problems that also contributed to the continued fall in the rupee.

Although the rupee index maintained the level above 50, the speed at which the currency is falling increased traders’ worries manifold, who see a further weakening in the Indian currency in the week ahead unless some clarifications emerged on GAAR, the taxation policy proposed in this year’s budget.

The continued uncertainty on tax proposals has been one of the reasons to keep the foreign investors at bay and foreign capital leave the country, according to India Forex Advisors Pvt Ltd CEO Abhishek Goenka.

To defend the rupee, the Reserve Bank of India was seen selling dollars and this helped slow the pace of fall. The rupee had hit its lowest on December 15, when it fell to 54.23 vis-a-vis the US dollar.

Analysts said the depreciation of the rupee could worsen inflation further by sharply increasing the cost of oil and other commodities that India imports and has to pay for in dollars.

That would also deepen the government’s already large fiscal deficit, because the country heavily subsidises imported fuel and fertilisers.

Although there is a widespread demand for RBI’s further intervention in the forex market, resorting to this has another side effect. RBI’s selling more dollars to buy rupee will deplete India’s foreign exchange reserve and widen current account deficit further.