Indian rupee (INR) continued its weakness, creating new record lows every now and then, and hurt corporate profits, margins and impacted market sentiment in Dalal Street.

The bearish sentiment led the BSE Sensex drop to its lowest close in nearly three weeks Thursday. The 30-share BSE index declined 0.28 percent, or 44.67 points, to 15,836.47.

Indian Rupee has dropped more than 18 percent from July highs and touched a life-time low of 54.30 to the dollar in early trade as it has been very sensitive to the U.S. dollar liquidity pressures apart from the domestic issues, including inflation.

Meanwhile, HSBC predicts that the sailing would not be a smooth one for INR and may touch the 58 level against the dollar.

In our view, the INR has room to fall further if global growth expectations continue to decline and USD liquidity pressures are intensifying, and if so we believe USD-INR could reach the 58 level, HSBC Forex Strategists wrote in a note to clients.

They do not anticipate a rapid recovery by the INR until there is a considerable improvement in the external environment or lower domestic inflation, which would see real interest rates become less negative.

Deteriorating Indian fundamentals have added to the worries about the Indian rupee (INR). Below-trend GDP growth in the second quarter of fiscal 2012 (July-Sep 2011), with October Industrial production similar to the levels seen in early 2009 has confirmed India's economic slowdown.

While November industrial production may rebound on better economic data, the elimination of volatile components and more working days, it is unlikely to provide a reason to cheer.

Indeed, with subdued industrial activity and a lagged negative effect on the services sector, GDP growth may fall below 6.5% y/y in the coming quarters, Standard Chartered analyst Anubhuti Sahay wrote in a note to clients.

Sahay expects the INR may weaken further near-term on growth concerns and capital outflows. Although India is a relatively closed economy, the INR is a pro-cyclical currency and cyclical challenges are likely to outweigh seasonal positives into the first quarter of 2012.

In addition, we expect little near-term relief for the trade deficit, as exports slow and the reduction in the import bill is limited by oil imports and investors' huge appetite for gold. As such, we do not expect INR strength to resume until economic expectations bottom out, spurring portfolio flows back into Indian markets, said Sahay.

Now, all eyes will be on the policy meeting of Reserve Bank of India (RBI) Dec.16 at which the country's Central Bank may hint at some measures to prevent the downfall of rupee.

While a cut in the repo rate, which currently stands at 8.50 percent, is not expected, there is some hope of lowering the cash reserve ratio (CRR) from its current level of 6.00 percent.

The liquidity deficit in the banking system of 880 billion rupees, well above the RBI's comfort level of 600 billion rupees, has increased such expectations.

However, with inflation still at elevated levels and the previous rate hikes still feeding through to the real economy, Sahay expects that the RBI will be in no hurry to signal a change in stance this week. Indeed, following recent comments from the RBI that the CRR is also considered a monetary policy tool, a cut in the CRR appears unlikely.

In terms of supporting banking-system liquidity, we expect the RBI to continue with its open market operations (OMO). Any rate cuts will thus have to wait until Q2-2012 when WPI inflation cools to 6.5-7.0%, added Sahay.

The rupee started tumbling after the downgrading of U.S. credit ranking and eurozone crisis. It slid against the dollar from 44.40 in July to 45.50 in August, 47.60 in September, 49.30 in October and 52.70 in November.

Investors recently have lost confidence in the currencies of emerging economies such as Indian Rupee as worsening debt crisis in Europe is hurting the sentiment. As a result, the rupee became the worst performing currency among major Asian peers and is expected to continue its downward spiral against the U.S. dollar.

Amid rising oil import bill and external debt, the rupee-dollar exchange rate could well reach the levels of 53.80 by January 2012 and 55.10 by March 2012 if the global economy continues to be bleak like in recent months, industry body ASSOCHAM (Associated Chambers of Commerce and Industry of India) said late November.