Opening the day at 41.79/80, little unchanged from its Monday finish, the rupee crossed 42 as SBI held back from selling dollars. Fuelled by strong corporate demand for the greenback, the rupee went lower to 42.10 levels where it hovered for some time. By noon, the rupee was seen at its all-time low of 42.25.

In later trades, the rupee gained to 42.21 levels, reportedly on account of profit-taking by banks to finally close at 42.24. Quite a few trades appeared to have been struck at 42.10-42.15 levels, dealers said.

Finance secretary Montek Singh Ahluwalia's statement that the Reserve Bank was"doing very well" in regulating the country's foreign exchange market did little to change the sentiment on the rupee though it briefly recovered to 42.08/11 to the dollar. Ahluwalia added: "The Reserve Bank has all the resources to prevent any speculative upsurge in the foreign exchange market. We should not focus too much on the rupee. The truth is that in these days there is a lot of foreign exchange volatility." Elsewhere in Asia, the yen's slide affected Asian sentiment. The yen fell below 141 to the dollar in early trades. Despite a small rebound later, traders worried about the threat it posed to the competitiveness and stability of regional economies.

Regional currencies were mostly steady, but the Australian dollar remained weak. The yen's fall remained the dominant issue throughout the region, whose recession-threatened economies are linked with Japan through trade and loans.

"There's a clear risk of further falls for Asian markets; it all depends on the pace of the yen's decline," said INGBaring's global strategist in London, Shaun Roache. Dealers in Mumbai said regional uncertainties had cast a shadow over the rupee, but that was not the main reason for its fall on Tuesday. According to Mecklai Financial Services' senior vice-president KN Dey, "The rupee went lower as the State Bank did not sell dollars today... For most of last week, the bank's dollar sales had set a floor for the rupee at 41.80 levels, which gave way today."

Stanchart's chief forex dealer Sharukh Wadia said: "Dollar inflows are weak, but demand is strong. FIIs have sold and are repatriating. The spot rupee came under pressure as a result." In the forwards, premiums opened higher, but closed nearer to their Monday's finishes. The six-month annualised forward premium ended at 9.80 per cent, lower from its last close at 10 per cent and an intra-day high of 10.50 per cent.

Said Stanchart's Wadia: "There was panic-covering in the forwards when the rupee crossed the 42 mark. Later, public sector banks, including State Bank,were seen receiving, which helped forwards come down by quite a bit."

November premiums were seen higher at 208/210 paise levels before closing at 193/195 paise. Nearly 7-10 paise drops from early levels were seen in December premiums, which finished at 233/236 paise, February at 309/313 paise and March at 347/352 paise.

Insight -- No need to panic yet

The slide in the rupee was expected, consequent upon FIIs repatriating funds. The SBI's efforts to hold up the rupee made little sense as it could make losses when buying back the dollars at higher levels. In any case, forex experts say that, according to some calculations, the rupee continues to be over-valued in terms of the real effective exchange rate (REER).

But, the fact remains that there has been a precipitate fall in the value of the rupee by about 6 per cent since May 13, the day of the second series of nuclear tests. Together with FII selling and fears of lower foreign funds inflow, most people expect the rupee to declinefurther.

While the decline itself may not be cause for concern, the RBI needs to ensure that the decline does not lead to panic. Events earlier this year have shown that the RBI is capable of stemming any precipitate decline. However, the continuing depreciation, coupled with other cost-push factors, will result in higher inflation.