MUMBAI (Reuters) - The rupee dipped below 53 to the dollar on Wednesday, nearly touching a four-month low, as oil importers bought the U.S. currency, but suspected Reserve Bank intervention helped it recoup some losses.
Though the rupee is likely to continue facing strong support at the 53 level in the near-term, traders expect further falls, given India's fiscal and economic challenges, and fears that waning foreign flows will worsen the current account deficit.
Moreover, dealers say the central bank has limited firepower to intervene should the rupee continue to fall, given dollar sales would exacerbate an acute liquidity crunch in India's banking system.
Economists also say India's relatively modest forex reserves -- with the lowest import cover since 1996 according to a recent Bank of America-Merrill Lynch report -- do not provide enough ammunition for a strong defense of the rupee.
"The RBI was not so aggressive in intervening. They also feel that the rupee should weaken given the macroeconomic fundamentals. They will only cap the volatility," said Hemal Doshi, chief financial strategist at Geojit Comtrade.
The rupee fell to a low of 53.02 to the dollar on Wednesday, a level last seen on Jan 5, before pulling back to close at 52.96/97 levels. It had closed at 52.73/74 on Monday.
Four dealers said that state-run banks were seen selling dollars when the rupee broke below 53, which they said was likely on behalf of the Reserve Bank of India.
Some dealers said the RBI also intervened in the rupee forwards market to offset the liquidity impact of its spot selling.
"There were rumours of RBI intervention in spot market through nationalised banks and simultaneous action in FX forwards and bonds to neutralize the impact on money market liquidity," said Paresh Nayar, head of fixed income and forex trading at First Rand Bank.
The one-month offshore non-deliverable forward contracts were at 53.32.
In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all ended around 53.26 on a total volume of $4 billion.
Additional reporting by Archana Narayan; Editing by Rafael Nam