As the benchmark S&P BSE Sensex tanked by more than 700 points in the afternoon, the finance ministry on Friday said excessive rupee volatility is impacting the equity markets.
"Our sense is that what is seen in India is happening due to what is happening all over the world. The rupee worry also spills over to the equity markets and the equity worry spills over to the rupee. It is potentially vicious," a ministry official said.
The rupee on Friday touched an all-time low of 62.03 to a dollar, spooking the equities market and dragging the Sensex down to 18,621.39 in the afternoon.
The index had closed at 19,367.59 on Wednesday.
"The rupee will finally find a level based on the state of the economy. We are happy or prepared to live with orderly movement in the value of the rupee," he said, adding that the government and the RBI at present do not want to use their armoury and would rather stick to relatively smaller measures that won't choke growth.
"If the government wants to arrest the fall in the rupee by completely choking liquidity, it is very easy to arrest the fall in the rupee, thereby hurting the growth process," he said.
The decline in the currency and the equities markets, he said, was also on account of US data showing that joblessness in America was reducing, fuelling fears that the Federal Reserve would start withdrawing its stimulus.
US Federal Reserve chairman Ben Bernanke had earlier indicated that the Fed could taper its bond-buying programme with an improvement in the US economy.
"The data which has come out indicates this could finally be the beginning of easing. It (the tapering) could be as early as next month's bond-buying programme," the official said, adding that this concern affected the markets on Friday.
To restrict the outflow of foreign currency, the RBI had on August 14 announced stern measures, including curbs on Indian firms investing abroad and on outward remittances by resident Indians.
The central bank reduced the limit for overseas direct investment (ODI) by domestic companies, other than oil PSUs, under the automatic route from 400% of net worth to 100%. Higher levels of ODI would need prior approval from the government.
The finance ministry official, however, said the measures taken by the RBI cannot be called capital control measures and they had more to do with reducing stress on the balance sheets of corporates.
"With rising NPAs, corporates are getting more and more into difficulties...so looking into their balance sheet before they are allowed to invest abroad is all that has been proposed. Hence, it is not capital control," the official added.
He said if the government is taking measures to increase capital inflows, it is part of the package to take measures to discourage outflows.
Earlier this week, finance minister P Chidambaram had reiterated that the current account deficit (CAD) would brought down to USD 70 billion this fiscal from USD 88.2 billion in the previous year and steps would be taken to increase foreign fund inflows.
Referring to the rupee, he had said: "Given our fiscal deficit, given our CAD, there will be some pressure on rupee and rupee will indeed depreciate. All that we are saying is that we cannot allow the rupee to go into a free fall. We are arguing for a stable rupee."
Meanwhile, Chidambaram met Prime Minister Manmohan Singh during a meeting for reviewing FDI policy in pharma sector.
Speculation was that the two may have discussed the latest situation on the stock market and fall of rupee, but this could not be confirmed.