RBI to tolerate weaker rupee as inflows dry up

India's central bank will tolerate a weaker rupee as the country's external sector confronts multiple headwinds including a wider trade gap and stalling of dollar inflows into the world's fifth-largest economy, three sources familiar with the central bank's thinking told Reuters.

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The Reserve Bank of India (RBI), which had supported the rupee through aggressive interventions via dollar sales until last month, has allowed the rupee to fall 1.3% in the last seven trading sessions to a record low of 90.42 per dollar.

The rupee, down 5.5 per cent on year, is Asia's worst performing currency.

By signalling tolerance for a weaker rupee, the central bank is indicating that it will intervene mostly to curb sharp volatility or on any signs of a speculative buildup but not defend any specific level on the rupee, the sources said.

"It doesn't make sense to spend reserves when fundamentally everything is against the currency," said one of the sources, who commented on condition of anonymity as they were not authorised to speak to the media.