Weak equities saw sentiments getting adversely affected, after weak closing in the US markets and downgrading of banks by Moody's. Dealers say that in early morning trade the Reserve Bank of India had not been selling dollars.
However, the sharp fall may prompt the RBI to sell dollars to bring about stability of the rupee. The RBI has made it clear it will intervene not to prevent the rupee from falling, but to reduce volatility in the markets.
Foreign fund flows, which at the beginning of the year had help sustain the Indian currency have also dried up. In fact, the months of April and May saw net outflows from foreign funds.
The rupee is expected to remain under pressure and is likely to continue to weaken as economic fundamentals, particularly the current account deficit and the fiscal deficit continue to rise.