State Bank of India sold dollars amounting to $50 million between 42.76 and 42.78 levels in a bid to arrest the rupee's fall. Dealers expect the rupee to quote lower in the 42.75 to 42.85 band against the dollar on Thursday. All markets are closed on Wednesday on account of Ambedkar Jayanti.

``The fall in the spot rupee was largely on account of inter-bank interest for dollars, but this may prove infectious and affect corporate sentiments. Thursday could may well decide the rupee's future movement," said a forex dealer.

The AIADMK statement that withdrawal of support to BJP government is inevitable made the markets jittery. A later day report on a wire agency that Jayalalitha will do so either on Wednesday orThursday compounded the negative sentiment further. Dealers said though most of the news was discounted, the markets were nervous about the BJP-led coalition government's ability to weather the political storm.

Opening the day at 42.69/72, the rupee went to its low of Rs 42.78. Dollar sales by the State Bank helped it recover to gain to 42.70 levels before closing at 42.64/76.

The six-month annualised forward cover went higher in tune with the weakening in the spot rupee to close at 7.20 per cent from its last close at 6.99 per cent. "Trades might have been inter-bank today, but it is only a matter of time before it becomes corporate-interest driven. Premiums may not have moved up much, but that could because of buy/sell swaps by state-run banks," Harding at IndusInd Bank said.

The sentiment for the rupee had turned bearish after the Indian currency slumped to a seven-month low of 42.68/71 against the dollar last Tuesday (April 6) on political concerns following the AIADMK's then threat of withdrawal ofsupport to the BJP-led government. Nervousness gripped the forex spot market following Jayalatha's resolve to withdraw support to the BJP-led government causing fears of renewed political instability at the centre. Operators rushed to cover dollar positions and pushed the rupee down to 42.77/80-dollar, but timely spot-dollar sales by the SBI partly halted the rupee slide.