The rupee depreciated to fresh two-year lows on Monday, as intensifying worries over China's economic growth triggered heavy currency sell-off in global markets, including India.
The rupee fell sharply to close at 66.72 against the dollar on Monday after the benchmark stock index, the S&P BSE Sensex, fell over 1,100 points in early morning trade. Overall, the rupee has fallen by 4% in the past two weeks.
However, the rupee pared some of the losses later on, but still remained at its lowest level since September 2013. The domestic currency had hit its lowest at 68.80 against the US dollar on 28 August, 2013.
The rupee has been under pressure ever since the Chinese authorities opted for yuan devaluation two weeks ago. The devaluation triggered a global sell-off in currencies, including the Indian rupee.
Investors are also worried that China may be compelled to devalue its currency further if its economy faces further slowdown.
Another round of devaluation could fuel concerns of a global currency war, which will be detrimental to global economy.
"I am afraid there is going to be further pressure on emerging market currencies. I do not think this is necessarily the end of it," Khoon Goh of ANZ Research told CNBC-TV18.
To ease concerns over the continuing depreciation of the rupee, Reserve Bank of India (RBI) governor Raghuram Rajan said that "the Reserve Bank will not hesitate to use its USD 380-billion foreign-exchange reserves to jag out volatility".
"India is in a better position compared to other markets," Rajan said.
Many analysts expect the rupee to remain slightly resilient to China's yuan devaluation compared to other Asian currencies.
"The impact of yuan devaluation on the rupee will be less compared to other Asian currencies such as the South Korean won, Taiwan dollar and the Singapore dollar," Roy Teo, a Singapore-based currency strategist at ABN Amro Bank NV, told Livemint.