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The rupee dropped to a record low of 62.03 per dollar on Friday, sparking late intervention from the central bank as its measures to tighten capital outflows raised concerns they could spook foreign investors.
The Reserve Bank of India late on Wednesday unveiled rules to restrict how much its citizens and companies can invest abroad and announced additional curbs on gold imports.
The steps raised concerns of outright capital controls that would further undermine the confidence of foreign investors and also that they did not address the need to attract overseas investments to narrow the record high current account deficit.
Concerns that foreign investors would sell were also reinforced after upbeat US jobless claims data on Thursday suggested an early end to the Federal Reserve's asset purchases.
"I am not surprised to see the rupee continuing to fall," said Suresh Kumar Ramanathan, regional fixed income and currency strategist for CIMB in Kuala Lumpur.
"The natural action should be to provide additional local flows and liquidity. That never came by, so India is paying for it now,"
The partially convertible rupee closed at 61.65/66 per dollar compared with 61.43/44 on Wednesday.
Financial markets were closed on Thursday for a national holiday.
On the week, the rupee fell 1 per cent.
Shares fell 4 per cent, marking their biggest single-day drop in almost two years, as blue chips including HDFC Bank were hit across the board on fears US stimulus tapering would hit foreign selling.
The benchmark 10-year bond yield rose 38 basis points to 8.88 per cent on the day, its biggest single-day rise since July 16.
The broad selloff in the equity and debt market added to the rupee's woes with foreign funds pulling out their investments.
Foreign funds have sold debt and equity worth more than $11.7 billion, with over $10 billion coming from debt, since late May when fears of the US tapering first started.
In the offshore non-deliverable forwards, the one-month contract was at 62.29 while the three-month was at 63.26.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 62 with a total traded volume of $3.1 billion.
