India rupee plunges to fresh low against dollar

A shopkeeper holds a 500 rupee note at a roadside food stall in Mumbai on May 7, 2012.

India's rupee plunged to a fresh record low against the dollar Tuesday over concerns that foreign capital could flow back to the United States as the American economy picks up.

The rupee, one of Asia's worst-performing currencies this year, hit a new low of 61.80 rupees to the dollar, sliding past its previous low of 61.21 rupees on July 8.

The dive came as India named a former International Monetary Fund (IMF) chief economist as its new central bank governor.

Raghuram Rajan, acclaimed for predicting the 2008 global financial crisis, will head the Reserve Bank of India for a three-year term, replacing incumbent D. Subbarao, who retires next month.

The government and the bank "have no doubt we will be able to deal with the (the challenges) facing the economy", said Rajan, who is known for his pro-market views.

The rupee rallied after dealers said the central bank intervened in the foreign exchange market to support the currency, ending the day at 60.77 rupees.

Indian shares closed down 2.34 percent to 18,733.04 points in nervous trade.

Demand for the dollar has been stoked by speculation of a scaling back of US stimulus as the world's largest economy recovers, analysts said.

The rupee has plunged 12.83 percent in 2013, including Tuesday's fall.

Analysts fear the currency could fall to the 62 rupee to the dollar level or lower in coming months when the US starts tapering stimulus.

"The rupee is on a runaway train and no one knows where it will stop," said Naveen Mathur, a senior analyst at Mumbai's Angel Broking.

Slackening domestic growth, weak exports, rising foreign fund outflows and India's high current account deficit have battered the rupee.

The depreciating rupee stokes inflation by raising the cost of everything India imports from crude oil to chemicals and pulses.

The rupee depreciation is the latest blow for the scandal-tainted coalition of Premier Manmohan Singh, which is keen to see the economy pick up before elections due in 2014.

India's finance minister P. Chidambaram said Tuesday that the government is "continuously monitoring" the situation.

Analysts say the central bank may be forced to hike benchmark lending rates after earlier moves to tighten liquidity have failed to stabilise.

"Investment decisions from foreign investors are getting affected due to the currency volatility," said Nick Paulson-Ellis, chief executive of Espirito Santo Securities India.

"We understand one cannot drive structural reforms in a major way during an election year, but the government must act more in the areas to boost foreign direct investment (FDI)," he told AFP.

India last Thursday relaxed foreign investment rules in the massive retail and other sectors in a renewed reforms push to draw funds from overseas.

FDI -- seen as vital to reducing the deficit and spurring growth -- plunged to $36.8 billion last year from $46.5 billion the previous year, government figures show.

Overseas funds have pulled out a combined $10.56 billion in the form of equity and debt from India since June 1, as its macro-conditions worsen.

India's rupee woes have heightened speculation the nation could be headed for a crisis of the sort it suffered in 1991, which forced a bailout by the IMF.