India’s currency, the rupee, has hit an all-time low against the US dollar, prompting fears that the country could soon face a financial crisis.
The rupee dropped 35 paise to 53.29 against the US dollar in early trade on Tuesday after tumbling 81 paise the day before.
"The sharply deteriorating global economic environment has had a dampening effect on India."
– India’s finance ministry
In all, the rupee has fallen 14 per cent against the dollar since the start of 2011, and is the worst performer among Asia’s 10 most traded currencies.
At near-double figures, its inflation rate is also the highest among major global economies; and its stocks are also among the world’s worst performers, registering a drop of 18 per cent in 2011.
The falling value of the currency has fuelled inflationary pressures, causing the cost of imported goods, including crude oil, to rise.
Reserve Bank of India, the country’s federal bank, has said that it will act to prevent a further downward spiral of the rupee, but high inflation, slow growth and low consumer confidence mean that 2012 could be a tough year for the Indian economy.
Chetan Sharma, an independent financial analyst, told Al Jazeera that "the global [financial] mess is taking its toll in India, and that has been reflected in the numbers".
"Two month hence it was more to do with the crisis of confidence, but right now the numbers are playing up, and altogether it is not surprising," he said.
Meanwhile, India’s industrial output has plunged for the first time since the 2008 global economic crisis. Figures released on Monday showed that output shrank more than five per cent in October.
Last week, India’s finance ministry slashed its economic growth forecast for 2011-2012 to 7.5 per cent, from a February estimate of nine per cent.
"The sharply deteriorating global economic environment has had a dampening effect on India," the ministry said in a statement.
The economy grew 8.5 per cent in the previous financial year.
"There are three important factors. High inflation is leading to high interest rate which leads to lower growth. Third is the external factor, weakening rupee is stoking inflation as well as compounding matter on fiscal deficit," Sharma said.
"No reprieve really for India from here on, but I would say this is going to extend for a while. It is going to plateau, not necessarily steeply deep from here," he said.
Under pressure from coalition partners and opposition parties, Manmohan Singh, India’s prime minister, was forced last week to put on hold a decision to allow foreign supermarket chains to operate in India.
The halting of this flagship reform was a huge blow to the government, which will now struggle to pass serious reforms to attract long-term investment to India as its economy enters choppy waters.