Global currency market sentiment is likely to be driven by the US deficit and debt ceiling negotiations, with markets likely to turn more risk averse closer to October 17, the date by which the US Congress must approve raising the country's borrowing limit.
The improvement in the current account deficit is expected to provide a major reprieve to the government and the Reserve Bank of India which have been battling to prop up the rupee.
The RBI recently met with a handful of foreign banks and asked them to stop acting as market-makers for rupee NDFs, according to three bankers involved in the discussions.
The RBI's comments, announced after trading hours on Wednesday, comes as yields had risen by 60 basis points after a surprise hike in the repo rate on Friday and on worries about the fiscal second borrowing programme of the government.
The domestic currency spurted by 425 paise or 6.28 per cent in last five straight sessions.
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A higher subsidy burden and lower growth will weaken the country's fiscal metrics, analyst Atsi Sheth said in the presentation.
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The central bank was seen selling dollars consistently when the rupee would approach the record low of 68.86 hit on August 28.
Goldman says the downgrade reflects the more difficult external funding conditions for Asia as markets increasingly anticipate Fed tapering and eventual exit from unconventional monetary policies.
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Policymakers stepped in late Thursday to calm markets.
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The rupee slumped to a record low of 65.56 on Thursday and is headed for a sixth straight session of decline.
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The 10-year yield was last at 9.27 per cent, up 4 basis points on the day, tracking the rupee recovery.
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The rupee tumbled past 63.00 to the dollar, down about 2 per cent on the day and breaching the previous low of 62.03 hit on Friday despite a spate of measures in recent weeks by the central bank and government to defend it.
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The worst performing Asian currency of the year so far hit a new life low of 61.80 rupees per dollar on Tuesday, breezing past a previous low of 61.21 hit on July 8. Central bank intervention helped the rupee recover, but by Wednesday it was sliding once again, to stand around 61.41 by 1.30 p.m.
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Fag-end dollar selling by exporters helped the rupee to recover lost ground and settle at the day's high of 60.77, a gain of 11 paise. The rupee earlier touched an intra-day low of 61.21 on July 8.
The currency fell 3.4 per cent this week, and is below the levels at which it was trading on July 15 when the Reserve Bank of India unveiled its cash tightening steps to defend the currency.
The RBI stipulated on Thursday that foreign institutional investors would require a mandate from participatory note holders to hedge on their behalf.
Forex dealers will keenly watch, instead, if the central bank indicates more measures to stabilise the currency or gives a timeframe for its current action.
The rupee fell on Monday on fears of foreign outflows after stronger-than-expected US jobs growth data cemented expectations of an early end to US stimulus measures.
The RBI Governor says he does not have a specific foreign exchange rate target, which raises concerns that the central bank is unlikely to defend any particular level strongly.
RBI cannot aggressively intervene at this stage says the report.
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