Mumbai: The rupee slumped to a record low against the dollar on Wednesday as risk aversion in global markets added pressure on a currency already under fire from the country's current account and fiscal deficits.
The currency's slide came just before Finance Minister Pranab Mukherjee said he had directed his ministry to boost efforts towards fiscal consolidation. Government spending has been a concern for financial markets and a factor pushing the rupee lower.
"We are going to issue some austerity measures," he said in parliament.
Earlier on Wednesday, the rupee fell as low as 54.46 per dollar, breaching its previous record low of 54.30 in December. It was last trading around 54.40 compared to a close of 53.79.
Since March, the rupee has been the worst performing emerging market currency in Asia.
Traders and analysts said broad global risk aversion over concerns that Greece may pull out of the euro had tipped the rupee over the edge on Wednesday.
But the slide in economic growth, rising imports, controversial tax policies and regulatory uncertainty had all combined to drive the currency lower since last year.
Repeated currency intervention by the Reserve Bank of India (RBI) and a rash of other measures targeting deposits and exporters have failed to stem the slide in the rupee.
"Unfortunately for the rupee, this is not a great environment to run a current account deficit and thus be reliant on capital inflows from foreign lenders," said Sean Callow, a senior currency strategist at Westpac Banking Corp in Sydney.
"I suspect only radical steps by RBI - or sudden action by foreign central banks and/or G20 - will stop a push through 55 and quite possible higher," he said, referring to the dollar/rupee exchange rate.
A Reuters poll on Tuesday showed that analysts expect the rupee to hover near record lows against the dollar for the next month or so and then to start rising against the dollar.
The rupee has fallen nearly 10 per cent since its 2012 peak in February.
A poorly received budget for fiscal 2013 unveiled in mid-March eroded confidence in the currency by casting doubt on the government's willingness to implement policy reforms ahead of the general elections due by 2014.
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It has set a target deficit of 5.1 per cent of gross domestic product for the year to the end of March 2013.
Still, Mukherjee's promise of austerity measures faces a sceptical financial market where investors are concerned that government policy-making has stalled in the run up to general elections.
"The government has been only talking about fiscal consolidation but there are no steps at all, nothing being done to reduce the fiscal deficit," said Rupa Rege Nitsure, chief economist at Bank of Baroda.
Robert Prior-Wandesforde, an economist for Credit Suisse in Singapore, said financial markets were looking for initiatives from the government.
"It is very hard for the central bank to turn the currency around," he said. "Without doubt, the investors are looking for steps from the government in terms of structural reforms, be it in the form of news on goods and services tax or the direct tax code or some measures that might encourage infrastructure investments."