The rupee weakened by 17 paise on Wednesday, after the stock market continued to fall for the third day in a row. The rupee ended the day at 42.77/78 against the dollar, weakening from the Tuesdays close of 42.60/61, reports ET from   Mumbai   .

Dollar-buying pressure from oil companies has eased out, following the central banks decision to directly sell them dollars. However, the forex market faced pressure from the falling stock market, leading to fears that foreign investors will pull out of their holdings.
The rupee fell in tandem with the stock market, and fears are being raised over a possible shortage of dollars which could occur if outflows continue, said a trader with a private bank.

At the same time, market participants are not entirely clear about the RBIs scheme of selling dollars to oil companies, and some traders feel that it may not reduce their dollar-demand by too much.

The major concern remains that of foreign investors repatriating their funds. That the rupee had risen over 11% last year, riding on the back of foreign inflows to a booming stock market. However, consistent dollar-buying by oil companies as crude prices skyrocketed and fears of a slowdown in the economy have pushed the rupee down by about 7% this year.

Forward premia on near-term contracts rose, with the onemonth contract ending the day at 2.80% (1.70%). The six-month contract rose to 2.04% (1.54%) while the annual contract ended the day at 1.67% (1.36%). Meanwhile, bond yields rose, following the fuel price hike. Yields on the 10-year benchmark bond, the 8.24% bond maturing in 2018, ended the day at 8.14%, after rising to an intra-day high of 8.16%.

Yields had ended the day at 8.12% on Tuesday. Market participants fear that RBI will have to take inflation-controlling measures soon, which could include a hike in reporate or cash reserve requirements for banks. Liquidity remained comfortable, with banks parking surplus funds worth Rs 29,095 crore with the RBI, via reverse repo operations of its liquidity adjustment facility.