The slide this time is likely to be arrested as a number of corporates have already covered their positions, unlike the earlier round of sharp depreciation, when the downward pressure was compounded by importers covering their exposures, I-Sec said in its fortnightly debt market update.

The rupee dropped to an all time low of 40.77 on May 14 on fears of a slowdown in capital inflows and forward premia shot up with the six-month forwards quoting at 11 per cent per annum.

The RBI is unlikely to intervene in the forex market to prop up the rupee as the policy makers feel that the currency's fall on Thursday is essentially a long-overdue "correction". Sources close to the finance ministry said the central bank may "use this opportunity" to let therupee find its "correct level".

This also signifies a shift in North Block's perception of the "real value" of the rupee. Finance secretary Montek Singh Ahluwalia had recently said the rupee should not be depreciated to prop up exports. Exporters, according to the finance secretary, should focus on competitiveness and not bank on devaluation of rupee.

According to sources, neither the finance ministry nor the RBI was taken by surprise by the rupee's decline to an all-time low on Thursday. " What happened in the forex market today is not turmoil but correction," sources said.

With liquidity slowly drying up, RBI has the option of a CRR cut as outlined in the credit policy, the report said adding that this has to be balanced with the volatility in the forex forward market.

The call money rates are also expected to stay within the repo rate to bank rate band over the next fortnight and any sharp changes in rates would depend on any measures taken by RBI to manage the volatility in the forexmarkets.

The yield curve in the gilts market moved up sharply over the last week and yields are still very volatile with the market trying to gauge the impact of the US led sanctions. Outlook for the government securities market remains bearish as the government borrowing programme is expected to continue to put pressure on prices, I-Sec said. The goverment has so far raised Rs 16,000 crore through auctions and Rs 5,000 crore through private placements. The current uncertainity in both the forex and bond markets would make it difficult to attract active participation in an auction and the next auction is expected to take place only when the market stabilises, it added.

This would imply that the government has no other choice but to opt for exceeding its ways and means advances limit. The limit for the first half was Rs 11,000 crore and it has already utilised 75 per cent of the limit. The extreme volatility in money market rates led to the devolvement of 85 per cent of the 14 day treasury bill auctionand 81 per cent of the 91 day treasury bill auction, the report added.