Sale of dollars directly by the RBI can help but only temporarily for a day or two before it will be back to a volatile market.
The rupee, which has weakened to 76 against the dollar, is likely to further depreciate to 77 in the next few sessions as the dollar buying continues amid higher demand from foreign investors, according to CARE Ratings.
On Monday, the rupee fell to a record low of 76.3 against the US currency, before closing at 76.20 against the greenback.
It opened at 76.02 on Tuesday, registering a rise of 18 paise over its previous close.
"The rupee is now at the Rs 76 per US dollar stage and the next testing point will be 77, which is expected soon.
“The reason for this is more on the global side with the dollar strengthening and other currencies weakening," CARE Ratings said in a note.
The dollar-euro relation has moved in favour of the former at $1.07 per euro which is casting shadow on other currencies.
It said the Reserve Bank of India's (RBI) response has been on the side of fundamentals to provide dollars to banks through a sell-buy swap.
On Monday, the RBI conducted $2 billion of sell-buy swap for 6 months where the dollars were to be paid back to the central bank on September 25.
Total amount of bids received in the auction was only $1.53 billion and the bids accepted were for $0.65 billion.
The cut-off premium was 196 paise and the weighted average cut-off was 188.50 paise.
On an annualised basis, this would be close to 5 per cent premium.
"Quite clearly, the market was not too interested and supply of dollars will not be the main concern amidst this volatility," the note said.
The foreign portfolio investors (FPIs) will hold a clue because if they keep selling and the markets become nervous, the rupee will tend to decline, which is what is happening. Foreign institutional investors (FIIs) remained net sellers in the capital market, as they sold equity shares worth Rs 2,989.29 crore on Monday, according to provisional exchange data.
With these developments, the fundamentals have ceased to matter and sentiment is going to drive the currency, the rating agency said.
"Sale of dollars directly by the RBI can help but only temporarily for a day or two before it will be back to a volatile market," it said.
In the week to March 16, the country's foreign exchange reserves were at $481.89 billion as the RBI supplied dollar into the market to stem the rupee's fall.
The reserves had touched a life-time high of $487.23 billion in the week to March 6, after it rose by $5.69 billion.