Rupee Crashes to Record Low of 64.13

• India at its Lowest Rating

• Gold Rises as Informal Exchange Market and Hawala Surface following Physical Controls on Movements

• Indonesia, Brazil, South Africa Currencies Retreat in Synch with Dollar Rise

The Indian rupee slumped to a record low in early trade on Tuesday and bond yields hit another five-year high as Asia’s third-largest economy bore the brunt of growing money flows out of emerging markets.

The rupee slumped as much as 1.6 per cent to 64.13 to the dollar, adding to its 2.3 per cent rout on Monday, before traders said the RBI was seen stepping in to sell dollars.

The 1-month onshore forward rate for the rupee was at 64.47 while the offshore non-deliverable forward was at 64.71, an unusually wide gap that reflected bearish overseas bets against the partially convertible currency.

Emerging market currencies have been under growing pressure from outflows amid expectations the U.S. Federal Reserve will soon start to wind down its super-easy money policy, possibly as early as next month.

Indonesia’s rupiah, Brazil’s real and South Africa’s rand have also been in retreat as investors eye those countries that are most vulnerable to an exodus of foreign capital.

Markets are bracing for further losses, with 1-month non-deliverable forward trading at 64.71.

A spate of measures by the central bank and government has failed to halt the slide, with liquidity tightening measures aimed at making it harder to short the currency pushing up borrowing rates and battering corporate and investor sentiment.

The BSE Sensex fell 1.2 per cent to an 11-month low. JPMorgan downgraded Indian equities to “neutral” from “overweight”, citing strain in the country’s balance of payments, while Citi lowered its Sensex target to 18,900 from 20,800.

Late on Monday, the Reserve Bank of India increased the foreign direct investment cap in asset reconstruction companies to 74 per cent from 49 per cent.

Earlier on Monday, India banned the duty-free import of flat-screen TVs from August 26.

Overseas funds have pulled about $12 billion from local debt and equities since May 22 when Fed Chairman Ben S. Bernanke first signalled the central bank may pare its $85 billion monthly bond-buying program. The Fed may start tapering in September.

The slowest economic growth in a decade and a record current-account deficit have left Asia’s No. 3 economy vulnerable to a pull-out of funds. Pictet Asset Management SA sees no immediate policy fix as demand collapses for Indian rupee bonds, while UBS AG says a drop in the currency to 70 per dollar is possible.

The Reserve Bank of India on Aug. 14 announced measures to limit foreign-currency outflows from local companies and residents, and boosted efforts to lure investment. India will seek to increase capital inflows with steps including allowing state-owned financial companies to issue “quasi-sovereign” bonds to finance long-term infrastructure investment, Finance Minister Palaniappan Chidambaram said Aug. 12.

The yield on the 7.16 percent government bonds due May 2023 climbed seven basis points to 9.31 percent, according to prices from the central bank’s trading system. The rate has surged 111 basis points this month and is at the highest level for a benchmark 10-year note since July 2008. Global funds cut holdings of local debt to a 19-month low of $28.7 billion on Aug. 14.