From 21st may to 15th june Indian rupee broke below 55/dlr to record low setting up the prospect

of further falls unless the central bank takes measures or intervenes more aggressively, The rupee has now hit four consecutive record lows in as many sessions, at a time of intense turmoil over the euro zone, but there was no RBI intervention and no steps were taken to attract inflows via deposits and exporters' foreign currency holdings. Indian rupee is Asia's worst-performing currency this year and has proven particularly vulnerable to the global risk aversion given the steep fiscal and economic challenges facing the country. With just six months worth import cover, twin deficits, lack of confidence in the coalition government with regards to reforms, and also failure to attract foreign flows, suggests the INR is likely to hit 56-56.50 in the next two months. Also weighing on the rupee was dollar demand from oil firms and corporate. In the currency futures market, the most-traded nearmonth dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all ended around 55.09 on a total volume of $4.35 billion. The falls came even after the Reserve Bank of India announced the measures to target arbitrage and speculation in futures and options markets. Making dollars available for oil companies would remove a sizeable source of demand for the greenback from the market, and help support the rupee, which has hit record lows over the last seven consecutive sessions. RBI intervention and dollar selling by custodian banks as well as exporters converting their foreign currency holdings helped rupee gain. RBI remained positive for the market in the whole week. Indian rupee weakened as global risk aversion continued to darken the near-term prospects for the local unit. The RBI is believed to be looking to hold the rupee above the psychologically key level of 56 to the dollar, and has been seen intervening in the rupee forward markets, alongside its defence of the spot rupee. The central bank intervened briefly in spot markets and banks had been selling off their long dollar positions. Oil-related buying kicked in which weakened the rupee, as strong dollar demand from oil firms to meet month-end import commitments and a pullback in domestic shares from the day's highs weighed heavily. Concerns about India's fiscal and economic challenges are also impacting the rupee. The country allowed foreign retail investors to buy up to $1 billion in local corporate bonds in its latest move to bolster capital inflows and support the shaky rupee. RBI intervened in spot and forward markets to control the weakening of Indian Rupee. Indian Rupee clocking its worst month in half a year, as global risk aversion deepened and as a sharp slowdown in domestic economic growth added to gloom about its prospects. The perception of slowing policy reforms has further compounded the rupee's losses. The rupee's falls has set up expectations about more potential intervention from the Reserve Bank of India. The rupee continued to rise as a fall in global crude oil prices would allow oil companies to cut back on dollar purchases. Concerns on inflation, growth, twin deficits, all exist.

Oil importers stepped in to buy the U.S. unit, while waning greenback sales by corporates and exporters in late trade also hurt. The local currency was dented badly by a mix of global risk aversion and concerns about India's economic and fiscal challenges. Central bank could also cut interest rates. RBI intervention would be the most important factor in the near-term, however. After frequent interventions in both spot and forward markets. Central bank intervention helped offset the pressures from a weaker euro and from demand for the U.S. currency from oil firms. Global risk factors will remain key in the near-term, especially ahead of a meeting of G7 finance ministers that is expected to address the growing euro zone debt woes. The rupee has also been hit by waning confidence on India's economic outlook. A rate cut in China in late trade further boosted a revival in global risk sentiment which led to weakening of rupee. The Reserve Bank of India is also widely expected to cut domestic interest rates at its policy meeting on June 18 after growth slowed sharply in the first three months of the year, which may help improve confidence in the economy. The Indian rupee fell on tracking sharp declines in local shares, as the central bank was expected to cut rates less aggressively after inflation remained high, delivering potentially less of a kick to economic growth. Weakening domestic and global economic conditions have added to the likelihood it will take action to boost growth, despite lingering inflation worries. India reported headline inflation at 7.55 percent in May, in line with expectations, which however, under ordinary circumstances would keep the RBI focused squarely on controlling prices. However, Indian GDP growth slipped to a nine-year low of 5.3 percent in the March quarter, and industrial production was flat in May, data this week showed, adding to a sense of urgency about the deteriorating state of the Indian economy. Many market participants are betting on a modest reduction in both the repo rate and CRR because the combination of interest rate and liquidity easing would send a signal that the RBI is keen to prop up growth by providing liquidity to banks while ensuring inflation is under control. An easing in core inflation to around 4.85 percent in May give the central bank comfort to cut rates. Such an action would compel banks to cut lending rates as improved cash flow brings down their cost of deposits, which has remained high despite the RBI's previous rate and CRR cuts. The market also expects the RBI to sound pro-growth in its statement, and at the same time highlight inflation risks. Market reaction: Government bond yields and interest rate swaps could ease 5-7 basis points and the curves may shift downwards. The rupee <INR=D2> may rise marginally, with stocks posting modest gains.

The RBI may decide only to reduce rates but refrain from infusing more market liquidity, as it is already injecting cash into the system through bond purchases and may prefer to save the CRR tool for when liquidity tightens sharply. High food prices and consumer price inflation continue to pose risks to inflation and the RBI may not be comfortable turning dovish. However, only a repo rate cut may not be enough to spur banks to cut lending rates, or to improve sentiment sufficiently to bolster growth. To improve monetary policy transmission, the RBI could choose only to reduce the CRR, which would release liquidity and bring down banks' cost of funds immediately, enabling them to reduce lending rates. Many view a reduction in CRR as a more effective tool than a rate cut. The central bank has been under increasing pressure to cut the CRR after finance ministry officials and the country's largest state bank have called for one. The RBI may be reluctant to cut CRR by such a big margin, however, that could fuel inflationary pressures. Government bond and swap curves could steepen with short-end rates softening as cash pressures ease. Concerns that a steep CRR cut could prompt the RBI to avoid bond purchases could keep long-end rates elevated. investors hope the RBI turns actively dovish, betting that a big CRR cut accompanied by a rate cut ensures effective monetary policy transmission. With mounting pressure on the RBI from the government, some in the market believe the RBI may take the plunge and release an aggressively pro-growth policy. With a sagging economic growth, moderate core inflation, and increasing pressure from the government, it is unlikely that the RBI does nothing, as a downturn in domestic and global economic conditions has spurred calls for central bank action. Until a few weeks ago, the majority view was that the RBI would keep rates and CRR on hold at its June review.