Mumbai: India's rupee plunged to a new low yesterday and stocks saw their sharpest single-day fall in nearly two years on fears that foreign capital could flow back to the United States as the US economy improves.
The rupee, one of Asia's worst-performing currencies this year, hit a record of 62.03 rupees to the greenback, slipping past its previous low of 61.80 rupees on August 6.
India's stock markets saw relentless selling pressure, with the Bombay Stock Exchange's benchmark 30-share Sensex index plunging to close down 3.97 per cent or 769.41 points — its sharpest single-day point fall since September 2011 — to 18,598.18 points.
After the stock markets closed, a finance ministry official said that excessive forex exchange volatility was impacting the equity markets.
"The rupee worry spills over to the equity markets and the equity worry spills over to the rupee. It is a potentially vicious circle," an unnamed ministry official told the Press Trust of India news agency.
The currency recovered marginally but still ended the day at a record closing low of 61.65 to the dollar.
Yesterday's sharp decline reflects fears that recent measures by the Reserve Bank of India (RBI) may not be able to help slow down foreign fund outflows and the ailing currency, dealers said.
India's markets were closed on Thursday, so yesterday was the first day the markets reacted to new measures announced by the central bank to control forex outflows and prop up the rupee.
On Wednesday, the central bank said that Indian firms can invest only 100 per cent of their net worth abroad, down from an earlier 400 per cent.
Resident Indians will be able to send only $75,000 out of the country each year — down from $200,000 previously. "(Wednesday's) measures have caused fresh concern, suggesting that one can bring in capital (into India) but it is difficult to take it out," said Sonam Udasi, head of research with investment bank IDBI Capital.
Udasi said investors were worried that despite India's long-term growth potential, "things are not in shape in the interim period".
"This is a panic fall," said Ajay Bodke, an investment strategist at Mumbai brokerage Prabhudas Lilladher, as demand for the dollar has risen on expectations of a scaling back of US stimulus in September.
Since June 1, overseas funds have pulled out a combined $11.58 billion in equities and debt from India's markets, over concerns about the weakening economy, regulatory data shows.
"There is complete lack of faith in the markets. We are slowly, but surely, likely to enter a phase of a crisis," Param Sarma, chief executive at NSP Forex, a consultancy firm said.
Meanwhile, local gold prices surged by Rs1,310 ($21.20) per 10 grams, the most in two years, to Rs31,010 on strong demand from stores ahead of India's religious festival season — despite moves by the government to curb bullion imports to lower India's trade gap with the rest of the world.
The fall of the rupee is part of a wider trend as most emerging market currencies have depreciated in recent months against the dollar, which is strengthening as its economy recovers.
Dealers said there was no immediate sign of intervention by the central bank to prop up the rupee, which at yesterday's low had depreciated 13.2 per cent against the dollar so far in 2013.
The falling rupee stokes inflation by raising the cost of everything India imports from crude oil to chemicals and pulses.
The rupee's woes come as the government is struggling to turn around India's once red-hot economy by pledging new steps to narrow the gaping current account deficit — the broadest measure of trade — which hit a record level last year.
The economy grew at a decade-low 5.0 per cent in the year to March. The high current account deficit, slowing domestic growth and weak exports put heavy pressure on the rupee.
The central bank has said until the rupee stabilises it cannot lower borrowing costs to spur the slowing economy.