The Indian rupee slumped nearly 0.8 percent to an 11-month closing low on Tuesday as local and offshore traders grew more bearish on the currency because of thinning foreign investment inflows.
Dollar purchases by traders arbitraging between the onshore and offshore markets added to the downward pressure on the rupee.
The rupee closed at 46.2500/2650 per dollar, the lowest close since July 21, 2003, and sharply below Monday's close of 45.90/93.
"The outlook on the rupee is bearish for the moment," said a trader at a private bank. "People are worried about the new government's policies, and are concentrating on thinning investments inflows rather than on the positive fundamentals of the economy."He said trade inflows had also dried up, with exporters holding back remittances, expecting the dollar's value to rise further.
The rupee's fall has been stronger in the thinly traded offshore non-deliverable forwards (NDS) market, encouraging traders to buy dollars in India and sell them in Singapore and Hong Kong.
Arbitrage between the local and offshore markets is not officially permitted in India, so only banks or companies with overseas affiliates can undertake such trades.
On a net basis, the rupee has now lost 1.4 percent so far in 2004, as investors fret about the influence the government's supporters could wield.