The rupee on Tuesday hit its all-time low of 52.73 intra day against the US dollar on sustained demand for the US currency from banks and importers, mainly oil refiners, amid signs of further capital outflows.
Later in the day, the rupee managed to recover some lost ground amid speculations of Reserve Bank's intervention to arrest the slide.
RBI's role in forex markets could not be ascertained.
It finally settled the day at 52.29/30, still down by 15 paise from its previous close.
Meanwhile, Finance Minister Pranab Mukherjee said RBI's intervention in the forex market will not arrest the slide as foreign institutional investors' pullout and global reasons were behind the depreciation.
"RBI intervention (in the forex market) will not help," he told reporters.
RBI Governor D Subbarao while attributing the sharp decline in rupee to external factors said the central bank has not yet decided on intervening in the forex market to arrest the slide in the local currency.
"Our policy is that if the macro-economic situation is impacted due to the exchange rate fluctuation or undue volatility we will have to intervene. We are yet to decide whether to intervene or not at the moment," Subbarao said.
In seven straight sessions, the rupee has lost a total 217 paise or 4.34 per cent.
At the Interbank Foreign Exchange (Forex) market, the local currency opened bearish at 52.36/37 immediately touched its life-time low of 52.73.
Dealers said persistent capital outflows aided the rupee downtrend as FIIs pulled out $460.40 million in five days since November 15.
A recovery in local equities and late dollar selling by exporters stemmed the rupee fall, dealers said.
Meanwhile, the Indian benchmark Sensex on Tuesday snapped its straight eight trading days of losing string and closed up by over 119 points or 0.75 per cent.
Standard Chartered Bank Treasury Head Ananth Narayan said, "It was a similar story like Monday.
"The market closely watched the statements coming from regulators.
"There was bit of confidence that has come after the regulator's statement that it is closely watching the situation and will not allow any macro-economic instability due to rupee depreciation."
Subbarao said in Hyderabad, "Our policy is that if the macro-economic situation is impacted due to the exchange rate fluctuation or undue volatility we will have to intervene. We are yet to decide whether to intervene or not at the moment."
Referring to movement of rupee in the medium-term, Narayan said, "Rupee has depreciated around 8 per cent in last one month and such larger drop is not good for the economy.
So, the regulator is likely to come up some specific steps to ease pressure."
"Rupee should come back to Rs 50 level by March, 2012," he added.
The RBI fixed the reference rate for the US dollar at Rs 52.7015 and for the euro at Rs 71.0788.
The rupee continued its downward march against the pound sterling to settle at Rs 81.93/95 from Monday's close of Rs 81.59/61 and also dipped further to Rs 70.88/90 per Euro from Rs 70.08/10 previously.
It, too, moved down further against the Japanese yen to Rs 68.02/04 per 100 yen from its last close of Rs 67.82/84.
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