MUMBAI: India's currency fell sharply Tuesday and stocks tumbled nearly 3.5 percent in another major sell-off caused by uncertainty in the Middle East and a new gloomy economic forecast by Goldman Sachs.
The rupee, the worst performing currency in Asia this year, skidded nearly three percent to 67.96 to the dollar as shares fell 656 points or 3.48 percent to 18,229.42 points.
"In India, we have cut our full-year GDP growth forecast to four percent, from six percent," Goldman Sachs said in a note to clients.
It added that the rupee was likely to reach 72 per dollar in six months' time, recovering to 70 over a 12-month horizon.
Goldman Sachs said there was a risk of "near-term overshooting of our targets if economic and financing conditions worsen, and especially if there are pressures on the banking and corporate sectors due to weakness in growth".
Goldman Sachs joined a series of investment houses from HSBC to Nomura which have cut their growth forecasts for the once-booming Indian economy.
"We saw a temporary recovery in the rupee," said Param Sarma, chief executive with consultancy firm NSP Forex, referring to a two-day rally late last week.
"But this could not be sustained" amid persistent concerns over the rupee's strength and the weak economy, Param said.
Russian reports of missile launches in the Mediterranean Sea also accelerated the downward trend in mid-afternoon trading.
The stock market plunge was led by banking stocks on worries about the effect of corporate bad debts on their balance sheets. Private bank Yes Bank was down by over nine percent at 229.65 rupees.
The rupee's depreciation will pose a major challenge for Raghuram Rajan, the new central bank governor, who takes charge Thursday, replacing outgoing chief Duvvuri Subbarao.
India's economy grew by just 4.4 percent in the first three months of the fiscal year, the slowest quarterly expansion in over four years.
On Monday, an HSBC survey showed that India's manufacturing shrank in August for the first time in over four years.
The currency has also been depressed by the record current account deficit -- the broadest measure of trade -- which has been fuelled by oil imports.
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