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Is India's rupee back in the danger zone?

Brent Lewin | Bloomberg | Getty Images

India's central bank has spent the last few weeks making a concerted effort to prop up the battered rupee, but its latest rhetoric may have already undone that hard work with the currency back within sight of record lows against the dollar.

The rupee weakened to a two-week low at about 59.92 per dollar on Tuesday, reversing all the gains made since the Reserve Bank of India (RBI) said earlier this month that it would support its currency via monetary tightening measures.

(Read More: Defending currencies? More like digging a hole)

The fall in the rupee followed a statement from the central bank on Tuesday after its monetary policy meeting in which it said it would unwind the recent liquidity tightening measures when stability returns to the currency market.

"The RBI has alluded to rolling back the rupee-supportive measures and that sends a message to the market that it implemented those measures in a half-hearted way," said Vishnu Varathan, market economist at Mizuho Corporate Bank in Singapore.

"Its communication could have been better since it needs to distinguish between what is good for the economy and what is good for the rupee."

The rupee weakened to a record low of 61.21 per dollar on July 8. It has fallen sharply since May as investors pulled cash out of India on expectations that the U.S. Federal Reserve could start to wind back the asset-purchase program that has pumped billions of dollars into global markets in the past few years.

"It seems slightly strange for the RBI to tell the market that it will unwind the liquidity tightening measures as and when the currency has stabilized," analysts at Credit Suisse said in a note. "After all, by indicating such an approach, it presumably makes it less likely that stability will actually be achieved."

Mizuho's Varathan said the rupee could be vulnerable to further selling, with a move to the 62-handle against the dollar on the cards.

The problem for the RBI, say analysts, is that the central bank is being pulled in two directions – tighter monetary conditions help stabilize the volatile rupee but they also hurt economic growth.

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"The RBI is trying to balance multiple concerns: maintaining external stability, containing inflation, and supporting growth," HSBC analysts said in a note. "At the moment, it is more focused on external stability, which leaves it with no room to ease the monetary policy stance and forces it to keep a tighter rein on liquidity to stem undue pressures on the currency."

The RBI on Tuesday also lowered its forecast for India's economic growth for the current fiscal year to 5.5 percent from 5.7 percent.

Mizuho's Varathan said the central bank should focus on stabilizing the rupee in the short-term, since further weakness in the currency would exacerbate India's current account deficit and be harmful for the economy.

"Lots of uncertainty remains for the rupee and that could be difficult to remove," he said.

(Read More: India to call on millions of non-residents to defend rupee: Report)

—By CNBC's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC