The rupee plunged to a record low on Wednesday on heavy dollar demand by importers and as traders fretted over mixed signals from the central bank over its efforts to prop up the currency without choking off economic growth.
The rupee fell nearly 2 per cent to a record low of 64.54 to the dollar despite what traders said was sporadic Reserve Bank of India intervention in both the spot and forward markets.
It hovered in a range of 63.10 to 64.45 per dollar to close at an all-time low of 64.11.
Measures by the Reserve Bank of India late on Tuesday to support longer-dated credit sent prices of beaten-down bonds sharply higher but also led traders to question the central bank's resolve in defending the currency.
Since mid-July, the RBI has taken steps to tighten cash conditions, which have failed to support the rupee but sent bond yields surging, posing a fresh threat to the already cooling economy.
"Currency market and participants may consider it as a reversal of RBI liquidity tightening measures to prevent currency volatility; thus some pressure on currency may re-emerge," said Anjali Verma, economist at PhillipCapital.
With a record high current account deficit at 4.8 per cent of gross domestic product, India is especially vulnerable to funds moving away from emerging markets in anticipation of a winding back of the US Federal Reserve's stimulus programme.
Traders were looking ahead for clues from Fed minutes to be released later on Wednesday.
Deutsche Bank said in a note on Wednesday that the rupee could slide to 70 in a month or so, although some revival is expected by the end of the year.
The central bank's move to ease cash conditions after tightening them last month to support the rupee highlights the growing costs to the economy of stabilising the currency.
"The bearishness seen across markets is largely a reflection of the fact that there is no quick fix solution to arrest the rupee fall," said Shakti Satapathy, fixed income strategist at AK Capital.
The yield on the benchmark 10-year bond tumbled as much as 69 basis points on Wednesday to 8.21 per cent as its price rose.
It was last trading at 8.46 per cent, still down 44 bps on the day.
Local stocks turned negative, with the benchmark Sensex closing down 1.9 per cent.
Higher borrowing costs Bond yields had risen 135 bps as of Tuesday's close since the RBI first started tightening market cash conditions in mid-July by raising short-term rates to keep rupee speculators at bay.
Still, the rupee is down 7 per cent since then.
The RBI said late on Tuesday it will buy 80 billion rupees of bonds on Friday and will pare down its cash management bill sales as its target of pushing up the overnight rate to the central bank's emergency funding rate of 10.25 per cent had been achieved.
The RBI relaxed rules on mandatory bond holdings for banks, known as the statutory liquidity ratio, which will help protect lenders from large mark-to-market losses.
While banks had previously been asked to cut their hold-to-maturity bond holdings gradually to 23 per cent of deposits, the RBI on Tuesday allowed banks to retain them at 24.5 per cent of deposits.
Rupee hits new low vs British pound; breaches Rs 101-level: According to another report by PTI, the rupee on Wednesday hit a fresh low against the British pound and breached Rs 101 level in afternoon trade.
After crossing the Rs 100-level for the first time ever against the British pound in intra-day trade on Tuesday, the rupee had managed to close marginally below this mark at Rs 99.04 against the UK currency on Tuesday.
However, it slipped further to as low as Rs 101.2 this afternoon in the Interbank Foreign Exchange (Forex) market.
The rupee's weakness in recent months has come in the backdrop of various macroeconomic concerns in India, including a ballooning current account deficit and adverse global cues.
The rupee has depreciated by about 22 per cent against the pound in the past three months, from close to 83 in mid-May, while it was at about 80 in March.
The pound has become the first major foreign currency to cost more than Rs 100 apiece.
It is the most expensive against the Indian rupee among major foreign currencies, followed by the euro, Swiss franc, US dollar, Canadian dollar, Australian dollar, New Zealand dollar and Singapore dollar.
Text: Reuters and PTI