The rupee sank to a record low for the fourth day in a row on Thursday as investors grew increasingly bearish about the outlook for both the domestic and global economies, raising the prospect of further capital outflows from emerging markets.
The rupee hit an all-time low of 54.30 to the dollar in early trade, taking losses to nearly 20 percent from its July high with the pace of decline gathering steam in recent days.
It doesn't seem to have a circuit breaker and global environment for risk assets is likely to remain poor near term, said Sean Callow, senior FX strategist at Westpac Banking Corp in Sydney.
Offshore non-deliverable forwards were indicating further weakness, with the one-month rupee NDFs at around 54.80.
Callow said the rupee could test 55 in the short term.
The Reserve Bank of India, which has been largely absent from the foreign exchange market in recent days, was spotted intermittently selling dollars but it was unlikely to intervene aggressively, traders said.
The RBI's hands-off approach has amplified the currency's weakness as exporters have hesitated to book dollar receivables while importers have been forced to cover short dollar positions.
Overseas markets offered little comfort.
Asian shares fell into bear market territory for the year and commodities and the euro dropped on fears that Europe's debt crisis is still worsening, prompting investors to dump riskier assets in favour of the dollar and Treasuries.
Still, some like Vikas Babu, a currency trader at Andhra Bank, said the rupee could steady as market players book profits after the currency's fall of more than 4 percent this week.
The central bank's policy review on Friday could also offer some succour to the panicky foreign exchange market.
While markets do not expect an interest rate cut, analysts expect the central bank to signal a stronger resolve to intervene to hold up the beleaguered currency.