The rupee declined 106 paise to close at 60.47 against the dollar, completing a two-day fall and erasing gains after the RBI took steps to address exchange rate volatility.
The rupee fell even as the central bank said the recent liquidity tightening measures taken to curb speculation in the rupee will be rolled back in a calibrated manner as stability is restored to the foreign exchange market.
"The RBI in its monetary policy review kept the policy rates unchanged," said Abhishek Goenka, founder & CEO of India Forex Advisors. "However, the comments by the governor were enough to push the markets and rupee to lower levels. He sounded quite pessimistic on the economic growth outlook."
The broader Nifty index on the National Stock Exchange dipped below the 5,800 level to end with a drop of 76.60 points, or 1.31 per cent, at 5,755.05. The SX40 index on the MCX-SX declined 1.19 per cent.
"The dominant concern at the moment is external stability and lingering inflation risks," said Leif Eskesen, Chief Economist for India & ASEAN at HSBC. "While we expect that the RBI will eventually be able to roll back its liquidity tightening measures as the exchange rate stabilizes, it will likely not happen as quickly as the RBI hopes. This would have implications for growth and the scope as well as timing of further monetary policy easing.