The Indian rupee fell to a record low Friday as it succumbed to pressures of the debt crisis looming over the euro zone and the weak domestic indicators.
The rupee hit the all-time low of 54.82 against the dollar as investors became more averse to risk with increased concerns about the future of the euro zone.
The euro zone debt crisis has become a major disturbing aspect since the short-term movements in the rupee are influenced more by global factors than domestic features. The currency has continued to track the equity market closely, which in turn follows equity prices in other emerging markets. The Indian stock market fell in nine out of last thirteen sessions. The BSE Sensex plunged 1.56 percent or 250.52 points to 15,820 Friday morning.
There was no encouraging news from Greece, which is currently run by a caretaker government and is waiting for fresh elections to be held in June. There are concerns that parties opposing austerity measures will gain majority in the re-election. This will mean that Greece will not receive the much required bailout package, which will cause its banking system to collapse, leading to its exit from the euro zone.
There was more bad news from Europe as Moody's Investors service cut the ratings of 16 Spanish banks, including Banco Santander and BBVA which are the country's two largest banks. It has cited the weakening of the government's ability to support some banks in the crisis situation and the country falling to recession in first-quarter as reasons for such a decision.
The rupee, which has fallen 9.3 percent against dollar since March, has been badly affected by macro-economic issues faced by the country. Most importantly, the current account deficit widened to 4.3 percent of gross domestic product last year and fiscal deficit is 5.9 percent.
According to the Reserve Bank of India, the country's growth story remains intact in spite of the twin deficits. In April, the central bank stressed that there was no likelihood of a repeat of the situation in 1991 when India faced a balance of payments problem as a result of large fiscal spending in the previous years.
However, the slump in economic growth has become a major worrying factor for the country's policy makers. The economy grew 6.1 percent in the quarter ending December 31, which was the slowest growth in nearly three years and was a major retardation from the July-September quarter when the GDP growth was 6.9 percent. In the April-June quarter, growth was 7.7 percent. The country saw annual growth of 8.4 percent in the last two fiscal years.