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Mumbai: The rupee slumped to a record closing low of 55.39 against the dollar on Tuesday as the US currency strengthened after rating company Fitch downgraded Japan’s sovereign credit rating, citing rising public debt. The rupee fell to as low as 55.47 in intra-day trading.

It was the fifth day in a row that the rupee plunged to a record low. The Indian currency has fallen more than 8% this quarter, making it Asia’s worst-performing currency.

The Reserve Bank of India (RBI) was said to have been selling dollars before the Japan downgrade, strengthening the rupee in intraday trade, dealers said. But the move by Fitch led the central bank to leave the market as other Asian currencies also started depreciating with investors rushing to buy dollar assets.

The Indian rupee opened stronger at 54.60 a dollar level from Monday’s 55.03 after the central bank introduced measures preventing banks from taking large positions in currency exchanges.

The rupee followed other Asian currencies that had opened stronger amid a firm equity market. After Japan’s downgrade, the dollar started strengthening sharply as investors opted for the safety of dollar assets.

To reduce such volatility in the market, RBI on Monday instructed banks to reduce their positions on the currency exchanges to $100 million or 15% of their total OTC (over the counter) market exposure. It was the third instruction from the Indian central bank to lenders to reduce their currency market exposure.

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The rupee fell on Tuesday to hit another record low. Mint’s Joel Rebello looks at the causes of the latest fall and what RBI may do to stem it.

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However, this could have backfired, according to currency dealers.

They argue that by taking positions, banks help price discovery. After the directives came on 15 December, banks are not being able to take long positions in the market and have to square off their exposure immediately after a client comes with a forex requirement and the authorized dealer bank has to take a position on the client’s behalf. The volatility in the currency market, to some extent, can be attributed to this, dealers said on condition of anonymity.

Among local factors, demand from oil importers for meeting short-term oil bills was strong on Tuesday. For longer tenures, oil importers and other corporate houses have hedged dollar needs, traders said. However, the pressure on the Indian currency remains and it will continue to slide even as RBI steps in to stem the volatility, they said.

According to a report by Reuters news agency, only around $400-500 million remains unsold from exporter accounts.

Deputy RBI governor Subir Gokarn said on Monday that the central bank would continue to take steps to stabilize the rupee and was watching its movements closely.

RBI has been selling dollars in the market to arrest the depreciating rupee.

Between September and March, RBI had sold more than $20 billion in the spot market and close to $3.5 billion in the forwards market, according to RBI data.

Almost every day it is supplying dollars in the market, but the rupee continues to depreciate. The dollar selling is also sucking out liquidity from the local market. Banks on Tuesday borrowed more than 95,000 crore of overnight money from the central bank.

To ensure liquidity, RBI has been buying bonds from the secondary market. On Tuesday, the central bank said it will buy as much as Rs12,000 crore of bonds from the market.

However, experts said the rupee was no exception in the current risk-averse climate and unless the situation in Greece stabilizes, all emerging market currencies will remain under pressure. The Japan downgrade has added to this pressure.

The slide in the local currency is now solely driven by international events.

The rupee’s slide until the 54 per dollar level had been largely seen as a result of India’s economic weaknesses, the large current account and fiscal deficits, said a senior banker in the treasury of a large bank. “However, at the present level, it is nothing but international cues," said the banker who declined to be named.

“Rupee is largely mirroring the euro. People are saying the euro would fall as much as $1.20. If that really happens, rupee will slide to 60," said the banker.

At 08.43 pm, the euro was down 0.45% at $1.276.

anup.r@livemint.com

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