"There is a shortage of dollars in the market as participants are expecting the rupee to fall to 70-72 level."

The rupee continued its free fall against the dollar touching a record low of 68.85 on Wednesday. While bond yields rose sharply, stock prices remained choppy.

The rupee nosedived by 3.7 per cent to an all-time low of 68.85 intra-day before closing at 68.80/81 compared to its previous close of 66.24/25.

The fear of a possible U.S.-led military attack on Syria is leading to considerable outflows from emerging markets. Though the rupee recovered some of its losses momentarily as the RBI intervened it later shed all of its gains. The passage of the food security bill by Lok Sabha has also put further pressure on rupee, as it has raised doubts about the government's intentions to control fiscal deficit.

“The current price structure suggests the downside momentum in rupee continues to be strong, and further weakness can be seen up to the 70 mark, from where we might see some respite,” said Sugandha Sachdeva, Assistant Vice-President & Incharge-Metals, Energy & Currency Research, Religare Securities Ltd.

Bond yields rose sharply with the benchmark 10-year rate rising by18 basis points (bps) to 8.96 percent. In a highly volatile trade, it moved in a range of 8.76 per cent to 9.04 per cent. The five-year yield was up 32 basis points at 9.10 per cent, and one-year yield by 32 basis points at 10.16 per cent.

“RBI’s quantitative tightening campaign, in our judgement, has been, at best, premature and, at worst, wholly injudicious,” said BNP Paribas in a report on the Indian economy. It said “the recent liquidity squeeze is the wrong solution to the wrong problem, and risks proving entirely counter-productive.”

The RBI had tightened liquidity in the system through several measures in the last few weeks to shore up the value of Indian currency.

Sensex ends flat

Meanwhile, stock indices ended flat on Wednesday after recovering from a sharp fall intra-day, with the support of information technology stocks.

The S&P BSE Sensex closed with a marginal gain of 28.07 points at 17,996.15. But all other broader indices ended in the red.