The Indian rupee hit a fresh all-time low against the dollar Wednesday, as risk averse global investors wary of India's twin deficits drowned out central bank efforts to stem the currency's slide.
The rupee hit 54.44 against the dollar, breaching its prior low of 54.39 set Dec. 15, according to FactSet data. The slide helped send the benchmark Sensex index down 1.8 percent Wednesday.
Analysts said they expect the rupee to soften further, breaking 55 to the dollar, as Eurozone jitters dovetail with growing worries about India's slowing growth and current account and fiscal deficits.
The Reserve Bank of India sold about $20 billion between September and March to prop up the rupee, but India's falling foreign exchange reserves limit the bank's ability to intervene decisively, Abishek Goenka, chief executive of India Forex Advisors, said in a research note Wednesday.
The central bank last week ordered exporters to convert half their local foreign exchange holdings into rupees, a drastic move that analysts said would ultimately have minimal impact on the currency.
"The current account deficit has been increasing since April 2011, with imports rising faster than exports and deficit over balance of payments, supporting the demand for the dollar," Goenka said. "Poor IIP and WPI figures and outflow from the nation has created a path for the rupee weakness. The international factors are also adding to the weakness."
The sliding rupee is fueling a vicious economic cycle, which a growing number of critics say can be broken only by better fiscal discipline and structural reform by New Delhi. Global economic uncertainty has added urgency to those calls for change, as economists say India has less of a buffer to deal with external shocks now than it did in 2008.
The falling currency makes imports — especially of oil — more costly, adding to inflation and worsening India's deficits, which spooks already skittish global investors. That, in turn, decreases investment and makes it harder for the central bank to cut interest rates, worsening the growth outlook.
Hopes that India's weak ruling Congress Party will be able to corral its restive coalition partners and push through reforms that could unlock the country's growth potential and kick-start much-needed investment are fading.
In the policy vacuum, the central bank has borne the brunt of trying to stimulate growth, cool inflation and prop up the rupee — an impossible triad to manage with a single set of policy tools. India's inflation — driven by food costs and supply-side bottlenecks — has proven resistant to 13 consecutive rate hikes. The cool investment climate has as much to do with corruption and changing tax and telecom policies that could cost foreign investors billions of dollars as it does with high interest rates.
"Structural reforms and greater commitment by the government towards fiscal discipline are key for ensuring sustained gains in the rupee," said ING Vysya Bank economist Upasna Bhardwaj.
Finance Minister Pranab Mukherjee pledged Wednesday to proceed with unspecified "austerity measures," but was quick to blame external factors for India's troubles.
"The international situation is difficult. Country after country is witnessing economic crisis," he told India's parliament.
Mukherjee defended the government's record, saying it had taken positive steps to boost food production and build food storage facilities, as well as support rural demand and drive manufacturing job growth.
"We should have to depend substantially on the strategy that our growth would come from domestic demand," he said. "For that, we are stepping up a substantial amount of money in rural infrastructure, in rural sectors, in the social sectors."
Indian financial news channel CNBC-TV18 offered a scathing assessment of his remarks.
"Living in denial for our Indian policymakers," a CNBC-TV18 news anchor said after the speech. "Their policymaking seems to be fine to them, which the world doesn't believe."