The rupee hit an all-time low of 60.71 to the dollar on Wednesday, threatening to blow a bigger hole in household budgets and dashing hopes that the Reserve Bank of India (RBI) will make loans cheaper.
The currency has lost 13% since May, and it could continue to fall unless policy steps to boost the economy are outlined soon, analysts warned.
A sliding rupee is toxic. For a start, it means that India needs to shell out more cash to import fuel, and this in turn raises the prices of transporting goods, leading to higher inflation.And high inflation means that the RBI will hesitate to cut interest rates, a step needed to boost economic growth. So consumers need to keep paying large chunks of their income every month towards housing loans, even as the cost of food and petrol rises and the prospect of decent salary hikes recedes because the economy is struggling.
It's not just households. Companies that import raw materials are hurting badly, a situation certain to further hurt economic growth. Students wanting to study abroad or families who wish to go overseas for a holiday might also be forced to reconsider.
The rupee is falling because foreign investors are selling the currency, preferring instead to plough into the US market, which is showing signs of resurgence.
“The level of 62 to a dollar looks imminent in coming days and a breach might lead to a drift even towards 63-mark in near term,” said Sugandha Sachdeva, currency analyst, Religare Securities.
Amid all this, as if to tempt Indian buyers, gold prices hit a three-year low, falling Rs. 685 to close at Rs. 26,280 per 10gm.
Finance minister P Chidambaram has warned Indians to cut down on gold consumption so as to keep the current account deficit -- the difference between dollar inflows and outflows -- under control.
This deficit may also limit the RBI's ability to prop up the rupee by dipping into its $290 billion of foreign exchange reserves, enough to cover imports for seven months, analysts said.
“Return of foreign capital in the short term will critically depend on adopting the right policy mix to attract higher investment inflows and improve growth prospects of the economy," said DK Joshi, chief economist at CRISIL Research in a research report.