New Delhi/Mumbai: The rupee may extend Monday’s drop to a five-year low as the trade deficit swells and overseas investors dump local shares, said treasurers at Larsen and Toubro Ltd (L&T), Hero Honda Motors Ltd and the Essar group.

Dwindling capital inflows, elevated oil prices and slowing economic growth will undermine the rupee, said Yeshwant M. Deosthalee, chief financial officer at Mumbai-based L&T, India’s biggest engineering company. A weaker currency may also exacerbate an inflation rate near a 16-year high by increasing import costs, said Ravi Sud, chief financial officer at Hero Honda, the nation’s largest motorcycle maker.

“The drop in the rupee is unprecedented and never have I seen such a move in my 28-year career, barring the devaluation in 1991," said N.S. Paramasivam, who trades an average $200 million (about Rs940 crore) a day as head of treasury in Mumbai at Essar, which has businesses in shipping, steel and oil. “The downside risk to the rupee is mostly emanating from lack of dollar supply."

The rupee has dropped 16% this year, heading for its worst annual performance since 1991, when India devalued the currency as a balance-of-payments crisis forced it to pawn gold from its reserves. Exporters and importers alike are struggling to cope with as the exchange rate has swung between a decade-high and a 26-month low within a year.

The rupee touched 47.115 a dollar on Monday, its lowest since 3 June 2003, after reaching 39.185 on 7 November last year, its strongest since February 1998. There was a settlement holiday Tuesday on account of the half-yearly closing of banks.

Essar’s Paramasivam predicts the rupee will trade between 45 and 47.50 over the next six months.

India’s current account deficit may widen by $12 billion in the financial year ending March 2009, after reaching a record $17.7 billion the previous year, he said.

Implied volatility on one-month dollar-rupee options reached 17.25% on 19 September, the highest in at least nine years, after credit market losses led to the collapse of Lehman Brothers Holdings Inc. and US government takeovers of Fannie Mae, Freddie Mac and American International Group Inc.

“The magnitude and timing of the crisis has taken everyone by surprise," said Deosthalee. “Such sharp depreciation is not desirable. It’s been very challenging for us" to manage risks related to the rupee’s fluctuations.

Meanwhile, Suresh Tendulkar, chairman to the Prime Minister’s economic advisory council, said the Reserve Bank of India may “step in" to curb exchange-rate volatility.

“The financial crisis in the US is a matter of anxiety," Tendulkar added.

Kartik Goyal in New Delhi contributed to this story.