Mumbai: The rupee closed at a six-year low on concern that lower interest rates will diminish the appeal of local assets after the central bank unexpectedly cut its benchmark for the first time since 2004.

Desperate moves: RBI governor D. Subbarao. Despite the measures taken by the regulator to strengthen the economy, the rupee continued its journey downwards to fall to a six-year low on Monday. Kamal Singh / PTI

The prospect of lower returns may hurt the rupee as overseas investors are already fleeing emerging markets because of the global financial crisis, according to Vikas Babu, a currency trader at state-owned Andhra Bank. The local currency reversed earlier gains on speculation that importers bought dollars to settle defence-related import bills. “The rate cut reduces the return on rupee-denominated assets, leaving little incentive for an investor to buy," Mumbai-based Babu said. “This makes it less appealing for an investor abroad."

The local currency fell 0.3 to 49.0125 against a dollar in Mumbai from 17 October, the lowest since 7 June 2002, according to data compiled by ‘Bloomberg’. The Reserve Bank of India (RBI) cut its overnight lending rate, or the repurchase rate, to 8% from 9% saying the global financial uncertainty is “transmitting" to India. The rate advantage between India and the US narrowed to 6.5 percentage points from 7.5 percentage points following Monday’s decision.

The reduction was in addition to steps it had taken starting 11 October to lower the proportion of deposits lenders are required to keep as reserves. RBI cut the so-called cash reserve ratio by 2.5 percentage points to 6.5% in the past two weeks, freeing up Rs1 trillion for cash- strapped banks. Overnight lending rates eased to 5.5% after touching a 19-month high of 23% on 10 October.

Sales of Indian shares by overseas investors this year exceeded purchases by a record $11.7 billion as the benchmark Bombay Stock Exchange Sensitive Index, or Sensex, slid below 10,000 on 17 October for the first time since June 2006. Inflation that reached a 16-year high and the worldwide credit crunch triggered by the collapse of Lehman Brothers Holdings Inc. last month caused capital outflows. The rupee touched a record low of 49.26 on 10 October.