MUMBAI: The Indian rupee slumped to a six-week low on Tuesday, tracking local equities, as a massive setback to the Congress party in crucial state elections raised concerns over its ability to revive a stalled reform process.
The Congress party, which heads the federal coalition in New Delhi, was trailing in fourth place as vote counting neared its end in the politically important northern state of Uttar Pradesh.
Investor appetite for risk fell across the globe due to concerns over slowing economic growth in China and Europe along side risks of Greece failing to complete a debt restructuring deal, weighing on the local currency, traders said.
The rupee ended at 50.36/37, after sliding to 50.3950, its lowest since Jan 23, according to Thomson Reuters data. It closed at 49.835/845 on Monday.
“The election results mean that policy decision-making may become even more difficult for the (federal) government,” said Vikas Chittiprolu, a senior foreign exchange dealer with state-run Andhra Bank.
The rupee's movement will be influenced by the Reserve Bank of India's stance on intervention in the foreign currency market, traders said.
If the RBI sells dollars aggressively and signals its intent to prevent a sharp fall in the rupee, then a rebound may be seen in the currency. But if it holds back, then some selling in the rupee was inevitable.
“If the sentiment continues to remain so weak, we could see the rupee at 51 very soon,” Chittiprolu said.
In December, the RBI sold more than $9 billion in the spot and forwards markets, its biggest intervention in nearly three-and-half years, data released by the RBI in February showed.
Traders said given the disappointing election outcome, the federal government may announce a populist budget on March 16, a move that could worsen its fiscal deficit, hurt equities and foreign inflows.
Foreign funds have invested nearly $12.8 billion in local debt and equities so far this year, a factor, which had helped rupee rebound about five per cent.
It had dived nearly 16 per cent in 2011 to be the worst performer among major Asian peers against the dollar.
India's benchmark share index lost 1.09 per cent on Tuesday.
The one-month offshore non-deliverable forward contracts were at 50.78.
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 ended around 50.6, on a total volume of $5.1 billion.