The S&P BSE Sensex fell 550 points or 1.5 per cent to close at 35,975 on Wednesday as negative sentiments weighed on the back of the rupee breaching the psychological mark of 73 against the United States dollar.
On Wednesday the rupee slipped to a low of 73.42 per dollar as crude oil prices breached the 85 USA dollars per barrel mark, leading to huge outflows of cash.
The dollar rose to near 1-month highs against global currencies.
Federal Reserve Chairman Jerome Powell also stoked the surge in yields this week when he said the central bank could eventually boost its benchmark past the neutral level. Brent, the worldwide benchmark for crude, traded at $85 in Wednesday morning trading.
The trade deficit was at a five-year high of United States dollars 18.02 billion in July.
"Fuel and gas prices are on fire and markets are scurrying".
Foreign institutional investors (FIIs) sold shares net worth a net of Rs 1,842 crore Monday, provisional data showed.
"The fall in the rupee led to a sharp rise in government bond yields, due to increasing expectations that the RBI's monetary policy committee (MPC) could go for a bigger rate increase than expected on Friday", V.K. Sharma, Head PCG & Capital Markets Group HDFC Securities.
She said: "For bond markets, a 25 bps hike accompanied by a hawkish stance could trigger the 10-year bond yield to rise to 8.25 percent".
Besides, state-owned oil marketing companies have been allowed to raise Dollars 10 billion from overseas market to meet their working capital needs.
The central government and mostly BJP-led states announced a cut in excise and Value-Added Tax rates to reduce fuel prices by 5 per litre.
At the Interbank Foreign Exchange (forex) market, the domestic currency dropped 49 paise against the U.S. dollar in the early trade.
The RBI said that oil prices "remain vulnerable to further upside pressures, especially if the response of oil-producing nations to supply disruptions from geopolitical tensions is not adequate". Rupee was overvalued on trade weighted real effective exchange rate.
However, without any clear signals from the central bank, the rupee crashed to all-time low before settling at 73.34.