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Indian rupee sinks against dollar

Mumbai - The Indian rupee on Tuesday hit a record low against the dollar, as fears about eurozone debt and the global economy as well as falling local stock markets provoked further selling of the currency.

The rupee plunged to 52.50 against the greenback as foreign exchange markets opened, causing further problems for the Indian central bank as it tries to rein in near double-digit inflation.

The weakening rupee is expected to fuel domestic inflation because oil imports priced in dollars will become more expensive, translating into higher prices for local consumers and businesses.

"It (the weakening rupee) is disruptive, there is no question," the deputy governor of the Reserve Bank of India (RBI), Subir Gokarn, told reporters in the financial capital, Mumbai.

"There will be an impact on our import bill, particular for energy. It's having an impact on companies and it is a problem."

Gokarn, forex dealers and analysts said however that the fall matched market trends, as investors flee riskier emerging market and eurozone assets, pushing up demand for the dollar, which is seen as a safe haven in times of crisis.

Dealers added that the rupee's fall had been exacerbated by the finance ministry's comments on Monday that the Reserve Bank of India had only a "limited" ability to arrest the partially convertible currency's slide.

Media reports and analysts said the RBI had intervened for the first time in more than two months to try to quell the decline of the rupee, which has tumbled by about four percent against the dollar in the past six trading days.

"There's no official confirmation but people think that's the case," said economist Siddartha Sanyal, from Barclays Capital.

"At this moment, the dynamics seem to be pretty much against all emerging market currencies and that's not really helping the rupee," he said.

The RBI's Gokarn said the bank had no target level for the currency, although he admitted the weakening rupee could have an immediate impact on inflation.

"Any action we take now, if any, has to take into account the fact that these actions might have consequences a little further down the road," he added.

"So we've got to balance out actions now with risks or potential increase in vulnerability later on."

A fall in the domestic share market also weighed on the rupee on Monday, with the blue-chip Sensex index of leading shares falling 2.6% to 15 946.10 points.

The Sensex was up close to 1.0% in morning trade on Tuesday, with US-exposed IT firms and other exporting firms among the leading gainers.

The weak rupee makes their services cheaper for overseas clients.

India is a net importer, with one-third of foreign goods made up of crude oil that is used to power the energy-hungry nation.

The rupee is the worst performing of Asia's 10 most-traded currencies, having fallen around 14% since the start of 2011, while the 30-share benchmark Sensex index is faring worst among its regional peers.

It has lost 22% in the same period.

Thirteen interest rate hikes since March 2010 have slowed India's fast-paced economic growth but made little impact on rising prices.

Investors are also concerned about widespread corruption and a perceived lack of direction from the government, which has been embroiled in a series of corruption scandals for much of the past year.

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