The Indian rupee hit a record low at 52.73 to the US dollar on Tuesday leaving the corporate sector worried and stoking fears of inflation shooting up further as oil imports become costlier.
The Indian rupee fell to a record low of 52.73 to a dollar in early trade on Tuesday, before closing to 52.21 a dollar.
Finance minister Pranab Mukherjee, however, said the rupee's fall was a reflection of international economic uncertainty and added that an intervention by the Reserve Bank of India (RBI) would not help much at this stage.
"We expect there will be a self correction in the market," Mukherjee told reporters.
The Indian currency has weakened now about 16% in the last four months, having touched a high for this year in July.
Importers, especially oil companies, are now jumping in to buy dollars on fears that the rupee could slide further and make imports dearer.
"There is no fundamental reasoning behind the sharp depreciation of the rupee. The single most important factor that is causing this weakening is the global sentiment, the financial turmoil in Europe and the US," said Arun Singh - Senior Economist, Dun & Bradstreet India.
Singh said the volatility could continue at least till December-end as there was no support for the rupee from the domestic market, which was facing high inflation.
"A moderation in the global economic turmoil could bring back foreign investors as the growth fundamentals of the Indian economy are sound."
The RBI, which usually steps in to curb volatility in the currency, has not done so yet. Subir Gokarn, deputy governor of the RBI, said the central bank was weighing its options.
"We don't have a target or a rate in mind, the rupee is moving according to market dynamics. It's disruptive, there is no question," said Gokarn.
"There's an impact on companies and it's a problem. But, any action we take now, if any, has to take into account the fact that these actions might have consequences further down the road. So, we've got to balance out actions now with the risks of potential increases in vulnerability later," he added.
While it has brought cheer to exporters, a weak rupee is a cause of worry for many corporates who have raised funds from overseas sources.
During 2011 till date, Indian corporates have raised about $30 billion of external commercial borrowing (ECB). That is, about Rs 150,000 crore," said Jagannadham Thunuguntla, head of research, SMC Global Securities.
Companies preferred to raise funds through the ECB route as interest rates were much lower at 5-7%, compared to the 12-14% that Indian lenders were charging.
"This naturally translates into an increased burden on the Indian companies in repaying the ECBs. Such additional burden works out to $5.4 billion. That is, an additional burden of about Rs 27,000 crore," added Thunuguntla.