The rupee fell to its lowest in nearly two months after data showing a record trade deficit and a contraction in factory output stoked fears about economic growth at a time of continued high inflation.
The rupee's fall to as low as 55.12 to the dollar has erased a rally sparked by the government's announcements of a slew of fiscal and economic reforms in mid-September that took the local currency to as high as 51.32 to a dollar on Oct 5.
However, the rupee has steadily slipped since that peak, as investors resumed their focus on an economy set to grow at its slowest pace in a decade and on little prospects of immediate rate cuts as Reserve Bank of India retains its focus on inflation.
The trade deficit "is negative on the rupee. The uptrend in headline WPI into 8 percent has come into radar now. The rupee will need strong support from the euro to prevent extended weakness beyond 55.10," said Moses Harding, head of asset liability management at IndusInd Bank.
The partially convertible rupee was at 55.07/09 per dollar, after it fell to 55.12, a level last seen Sept 13. It had closed at 54.75/76 on Friday.
The rupee now remains at near the levels when the government raised diesel prices and said it would ease foreign investment rules into the aviation and multi-brand retail sectors, sparking a rally in domestic markets.
Still, it remains well above the record low of 57.32 hit in late June.
Data on Monday showed the trade deficit widened to $20.9 billion, marking a record, according to a Credit Suisse e-mail to clients sent after the data.
Other reports also proved worrisome for investors, with industrial output unexpectedly contracting 0.4 percent in September, while consumer price inflation remained elevated.
India is due to post October wholesale price index data on Wednesday, with analysts expecting headline inflation to have accelerated 7.96 percent, marking an 11-month high.
High inflation will likely deter the central bank from cutting interest rates this calendar year. The RBI signalled after its policy review on October 30 any easing in monetary policy would not come until the January-March quarter.
Copyright Thomson Reuters 2012