The rupee hit a record low on Thursday, clocking its worst month in half a year, as global risk aversion deepened and as a sharp slowdown in domestic economic growth added to gloom about its prospects.
The rupee, however, ended the session higher, as widespread market chatter about the RBI putting some curbs on dollar buying by state-run oil firms led to a sharp recovery, though the Reserve Bank of India and state oil company sources strongly denied the talk.
Multiple dealers received the same text message from an unconfirmed source, saying that the RBI has asked oil firms to restrict purchases through four state-run banks and co-ordinate dollar purchases.
The talk sent the rupee to a session high at 55.73 to the dollar, as traders had previously been anticipating measures targeting oil companies after RBI Governor Duvvuri Subbarao recently said that opening a dollar window for the sector was an option, though he has not committed to it.
"The move, if it happens, will take away pressure from the rupee resulting from oil buying. This also means RBI will be supplying dollars to oil companies via nationalised banks, which has been the talk in the recent days," said Paresh Nayar, head of fixed income and forex at First Rand Bank in Mumbai.
The partially convertible rupee settled at 56.08/09 per dollar as per State Bank of India data, after falling to a record low of 56.52 in early trade. The rupee closed at 56.23/24 on Wednesday.
The rupee has hit a string of record falls in May, and has now posted three consecutive months of falls, in its worst streak since the Global Financial Crisis.
The local unit remains Asia's worst performing currency so far this year.
Analysts don't expect a sharp recovery in the rupee anytime soon, especially after data on Thursday showed India's annual economic growth slumped in the January-March quarter to a nine-year low of 5.3 percent.
Though the intensifying worries about the euro zone, with Spain's banking woes now taking centre stage, have been the trigger for the rupee's falls, they've been magnified by the intense worries about India's economic and fiscal challenges.
"Going forward, the INR will see two way risks - external - which is currently not in favour of the INR and internal - the growth numbers slowing," said Suresh Kumar Ramanathan, rates and foreign exchange strategist at CIMB in Kuala Lumpur.
The perception of slowing policy reforms has further compounded the rupee's losses. A nationwide strike was held Thursday to protest the government's recent decision to allow petrol prices to be hiked, an action that had been initially welcomed by markets as a gesture of fiscal consolidation.
The rupee's falls has set up expectations about more potential intervention from the Reserve Bank of India, though most traders said they had not spotted any significant dollar-selling via state-run banks on Thursday.
The RBI has been spotted intervening frequently in both spot and forwards markets.
The one-month non-deliverable forward rate was quoted at 56.42, while the three month was at 57.11.
In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all ended around 56.40 on a total volume of $6.2 billion.