The rupee hit a new record low of 59.99 on Thursday after the US Federal Reserve signalled a broad timeline to scale back its monetary stimulus programme, spooking currency, equity and commodity markets. Central banks including the Reserve Bank of India (RBI) were forced to intervene hurriedly to prevent further damage.
A weaker rupee, which has fallen by more than 8% since May, will make studying or travelling overseas costlier as dollars turn expensive to buy. It will also push up the prices of all imported goods such as crude oil and gadgets.
Costlier crude oil and the resultant increase in fuel prices would fan inflation by knocking up the prices of most goods.
India's macroeconomic managers, battling to reverse a decade-low economic slowdown, however, said they were prepared to deal with the rupee's slide that can also stoke inflation.
"The markets may be over-reacting as they tend to do in such times," the finance ministry's chief economic adviser, Raghuram Rajan, said.
RBI, which is responsible for buffering the economy from currency shocks, intervened on Thursday to prop up the rupee by selling dollars in the market through state-owned banks, foreign exchange dealers said.
"We are not short of action or instruments as and when the need arises," Rajan told reporters in New Delhi.
The government is readying a raft of measures that include allowing upto 100% foreign direct investment (FDI) in India's telecommunications sector, and opening up the defence production sector to 49% FDI from the current limit of 26%.
A comprehensive FDI policy, easing caps on several sectors, is likely to be announced by end of July.
These guidelines, aimed at attracting foreign investments, will be broadly based on recommendations made by a committee headed by economic affairs secretary Arvind Mayaram.
US Fed chairman Ben Bernanke said on Wednesday that if all goes as anticipated, the central bank was looking to wind down the stimulus programme---pumping $80 billion (or about R4.8 lakh crore) every month --- by mid-2014.
A large part of these funds were parked in equity markets in emerging markets such as India that driving an extended bull run in bourses. The tap for such funds are expected to dry out with the Fed indicating a quantitative milepost to withdraw the stimulus. All eyes will be on the government's next round of reforms measures to attract foreign investment.