The rupee plumbed a new historic low for the second day running on Tuesday to touch an all-time low of 58.98 against the US dollar, and future contracts signalled some more depreciation was ahead.
The currency recovered some lost ground to close at 58.39, showing a net fall of 24 paise, after suspected intervention by the Reserve Bank in the market to check a freefall.
"RBI was possibly waiting to enter the scene at levels where importers step out and exporters step in. It did so today at around 58.9 levels. While the risk of the rupee going to 60-levels is diluted, more is needed to bring it back to 57-levels," said Moses Harding, head, market research at IndusInd Bank.
Dollar selling by state-run banks, believed to be acting at the behest of the RBI, prevented a fall though the 59 per dollar level, though intermittent bouts of dollar selling by exporters had also stemmed the slide.
The RBI, which intervenes only to prevent volatility, has a policy of not commenting on currency movements or confirming its interventions.
"Over the near-term we could see a range-bound action in dollar-rupee between 57.50 and 59.00, as recent spate of depreciation has been too fast," said Anindya Banerjee, currency analyst, Kotak Securities.
The rupee has weakened from 53.8 levels in April-end to over 58-levels at present and is also among the worst performing emerging market currencies in the 2013 so far.
"The rupee is likely to depreciate further as weak domestic fundamentals. A record current account deficit and high inflation still remains main concerns for the economy.
The major resistance for spot rupee is at 59. If it is breached, then next level to watch will be between 59.70-59.80," said Pramit Brahmbhatt, CEO, Alpari Financial Services (India).
Much of the outflow is linked to broader movements in which money is flowing out of emerging markets like India. In India’s case the pain is compounded by a high current account deficit that is triggering concerns and extra caution in the global futures markets.