Indian currency, stock markets plunge on fears of lower growth

India's once-booming markets plunged on renewed fears that recession in the U.S. and Europe and a central bank bent on raising interest rates will stymie economic growth this year.

The benchmark Sensex plummeted more than 700 points to end down 4 percent, while the rupee lost nearly 2 percent to fall to its lowest level against the dollar in two years before traders suspect the central bank intervened to arrest the slide.

Meanwhile, even as analysts from Credit Suisse and Deloitte predicted that the Reserve Bank of India is not through hiking interest rates to rein in inflation, even though further increases will hurt India's economic growth–along with a recession in the U.S. — Finance Minister Pranab Mukherjee effectively stuck his head in the sand, saying he (alone) remains confident that India will be able to achieve 8% growth this year.

The fall in the rupee will fuel India's inflationary woes, making imported goods such as foreign crude oil, on which the country is reliant, more costly, according to India's Economic Times newspaper.

At the same time, if the US economy falls into another recession, India may face a slowdown in exports, instability in financial markets, increased unemployment as well as lower growth, the paper cites Deloitte as saying.

In an interview with MoneyControl.com, Robert Prior-Wandesforde of Credit Suisse said the desperate offloading of Asian currencies is a signal that investors have lost faith in Asia's resistance to the economic flu in the West.

"Fundamentally, investors are now waking up to the truth that Asia is no immune to what is happening in the Western world. Indeed, more than that, because Asia is suffering, growth is taking a hit because of their policy actions. India has seen huge rise in interest rates, which is now beginning to impact growth domestically," Moneycontrol quotes Prior-Wandesforde as saying.

"Large parts of Asia are in a twin-shock with the impact of weaker domestic demand because of earlier policy actions and also the impact of Western world slowdown. The Asia hasn’t and won’t decouple. It is now beginning to dawn on investors that are piled in huge amounts of money into what they perceived to be a safe region."

He says the rupee is headed for 50 to the dollar — from around 45 for most of this year, and 40 in recent memory.  And as for the stock market, he says traders still haven't factored in all of the bank's relentless interest rate hikes.

The upshot: "There is still some bad news to come before it gets better," he said. "India might start outperforming early in calendar 2012 on that basis."