The rupee lost another 48 paise against the US dollar to Rs 64.67, its weakest level since September 2013, due to appreciation of the dollar overseas after China unexpectedly devalued the yuan for the second straight day.
Forex dealers said the yuan's devaluation has led to higher demand for dollars and has put pressure on the rupee. A lower opening of the domestic equity market also played spoilsport. The rupee had plunged 32 paise to close at nearly a 2-month low of 64.19 per dollar in yesterday's trade.
China's devaluation will have an adverse impact on Indian exports and foreign direct investment, Finance Secretary Rajiv Mehrishi said on Tuesday. But given Reserve Bank governor Raghuram Rajan's stance on inflation, India was unlikely to be drawn into a currency war with China, analysts say.
"If you're a net importer, you can't have devaluation as a stated objective as you are then increasing the cost of your imports," said Suvodeep Rakshit, an economist at Kotak Securities in Mumbai.
Devaluing the currency helps exporters, and there is a case for that in India where exports have fallen for seven straight months in part because the rupee strengthened against several currencies, while falling against the dollar. However, raising cost of imports might quickly push up inflation, something that Rajan is not likely to allow. Putting a check on living costs is essential in India, where most people earn less than $2 a day.
"We do have the ability to intervene in the currency for a while to reduce volatility but we don't want to get into the business of trying to maintain the currency at a particular level which is different from the level the market wants it to be at," Rajan had said in this interview.