The Indian rupee slumped nearly two percent to hit a new record low of 59.98 against a dollar and key indices of the stock markets crashed almost three percent Thursday, after the US Federal Reserve signalled an end to its monetary stimulus.
The partially convertible rupee opened sharply lower at 59.62 and hit a record low so far of 59.98 against a dollar at the inter-bank foreign exchange market in Mumbai, surpassing the previous lowest of 58.98 hit June 11.
The rupee closed at 59.57 against its previous day's close at 58.71. It touched a high of 59.50 intra-day.
The Indian currency dropped sharply a day after the US Federal Reserve chairman Ben Bernanke signalled that the Fed would start winding down its stimulus spending later this year. The Fed move is likely to lead to appreciation of the US currency against its major rivals.
Weakness in Chinese economy also led to the appreciation in the value of greenback.
Indian equities markets were also hammered on the Fed move. Benchmark Sensex of the Bombay Stock Exchange (BSE) slumped 526.41 points or 2.74 percent to 18,719.29 points.
The wider 50-scrip Nifty of the National Stock Exchange (NSE) tumbled 2.86 percent or 166.35 points to 5,655.90 points.
The currency as well as the equities markets remained jittery despite the government's assurance of necessary action.
Finance Minister P. Chidambaram held a meeting with his top officials in New Delhi to discuss the volatility in the markets.
After the meeting, chief economic advisor in the finance ministry Raghuram Rajan said the government was not "short of options" and it would take necessary action to ensure stability in the currency market.
"We are not short of actions or instruments. As and when need arises, we will be alert to development. We do not like volatility and will take actions when necessary," Rajan told reporters.
However, Rajan said there was no need to be "overtly pessimistic", as the Indian currency was not in shambles.
Planning Commission Deputy Chairman Montek Singh Ahluwalia said the rupee drop was a "temporary phenomenon" and the Reserve Bank of India would take action when needed.
"We are allowing the exchange rate to move with the market. RBI steps in when it thinks necessary," Ahluwalia said.
Ahluwalia said the Indian rupee has weakened more than the other Asian peers against the dollar largely due to the high current account deficit.
India's currency account deficit touched a record high of 6.7 percent in the quarter ended Dec 31, 2012. High trade deficit is likely to put further pressure on the current account balance.
According to data released by the commerce ministry early this week, India's trade deficit widened to seven-month high of $20.14 billion in May, due to sluggish exports and higher imports, notably of gold.
Analysts said the Indian currency would weaken further. "We continue to maintain our bearish outlook on rupee with a short-term correction in-between and expect the dollar to start its fresh bull run," said Abhishek Goenka, founder and CEO of India Forex Advisors.
"The ballooning current account deficit and cloudy outlook of reforms have added to the local currency's woes. Outlook of the currency is expected to remain weak till the structural measures are taken to improve the current account deficit and sentiments of foreign investors," said Kuntal Sur, director, KPMG India.
