The Indian rupee slumped to a record low of more than 68 to the dollar yesterday on growing worries that foreign investors will continue to sell out of a country facing stiff economic challenges and volatile global markets.
The pummelling in markets - which sent the rupee reeling as much as 3.7 per cent to an all-time low of 68.75 - forced the central bank to intervene while state-run Life Insurance Corp was spotted buying shares .
"If steps are not taken to implement the reforms necessary to tackle the structural issues, the government will be left with the so-called 3-D options: debt default, devaluation, deflation," said Angelo Corbetta, head of Asia equity for Pioneer Investments in London.
Foreign investors sold almost US$1 billion of Indian shares in the eight sessions to Tuesday - a worrisome prospect given stocks had been India's one sturdy source of capital inflows.
Policymakers have struggled to come up with steps that can convince markets they can stabilise the rupee and attract funds into the country despite extraordinary measures last month by the central bank to drain liquidity and action to curb gold imports and cut a huge oil import bill.
The partially convertible rupee clawed back some ground later in the day after posting its biggest daily percentage fall in 18 years on Tuesday.
Still, an assault on the psychologically key 70 level appeared imminent.
India needs foreign capital as it struggles with a record high current account deficit, growing fiscal pressures and the slowest economic growth in a decade.
BNP Paribas on Wednesday slashed its growth forecast for India for the fiscal year ending in March to 3.7 per cent from its previous 5.2 per cent - the weakest growth since 1991-92 when India buckled under a balance of payments crisis that required a loan from the International Monetary Fund.
The rupee has fallen about 19 per cent this year and foreign investors are paring equity positions, having sold a net US$3.5 billion in stocks since the start of July, although their net purchases so far this year still total US$12 billion.
In bond markets, foreign investors have sold more heavily, with outflows reaching US$4.5 billion so far this year.