Rupee could soon breach 56/$ mark after weakening to over three-month low of 55.72 on Monday as the US fiscal cliff event draws closer and Indian lawmakers are unable to agree on foreign direct investment (FDI) norms in winter session of Parliament.
Unease among investors owing to the dialogues between European leaders on the debt crisis will also weigh on the currency.
While the US lawmakers will resume talks on fiscal cliff later this week to reach a compromise between the Democrats and Republicans by year-end, the euro zone finance ministers will meet to discuss Greece debt plan deal.
The fiscal cliff refers to the automatic tax increase and spending cuts that will take effect by the end of 2012 and could push the world's largest economy into a recession.
A contraction of the US economy could considerably bring down the attractiveness of emerging market assets as well due to low risk appetite.
Rupee continues its weakness in spite of dollar index slipping to 80.16 levels after making the high of 81.45 levels. This seems to be a matter of concern as a recovery in the euro and weak dollar index fails to help rupee. If it is just because of month-end buying, we should see some correction coming up in the first week of December, else the levels of 56.50 won't be too far, said Abhishek Goenka, the founder & CEO, India Forex Advisors.
Along with global risk aversion, lack of concrete decision-making on key FDI proposals in retail and aviation in the winter session have also dragged down rupee. Winter session has so far been a washout with decisions over FDI still in limbo.
The rupee has been volatile and has again resumed its fall after a brief spell of appreciation in October. It has weakened 13% from the 2012 high of 48.70/$ seen in February but has recouped only 3% from the all-time low of 57.32/$ hit in June.
According to Moses Harding, head of research and asset liability management at IndusInd Bank, if rupee weakens to 56/$, it would require strong measures from the government or intervention by the Reserve Bank of India for it to recoup its losses.
There is immediate need to establish rupee stability (with bullish undertone) till issues related to trade (and current) account deficit is addressed, he said. RBI has been largely absent from the market over the last one month even though the currency has weakened every successive week.