The central bank's liquidity-tightening measures had been able to halt the currency's depreciation over the past two weeks.
In the post-policy press meet, Subbarao, whose five-year term ends on September 5, acknowledged there was a strong case for policy easing, as growth had moderated more than expected, but added that an uncertain external sector was preventing such a step. After cutting the key policy rate 75 bps over three straight policy reviews, RBI had kept it unchanged in June.
On Tuesday, RBI kept its March-end inflation forecast unchanged at five per cent, while it lowered its estimate for 2013-14 economic growth to 5.5 per cent, from 5.7 per cent projected in May.
"As far as the broader monetary policy stance is concerned, there would have been reasonable arguments for further monetary easing, because growth has moderated more than we expected and inflation is not as uncomfortable as before... But there are external sector concerns," Subbarao said.
The governor assured policy rate could be eased when there was some stability in the exchange rate. But he warned about a host of risk factors, including external situation, which could impact capital flows; and pass-though of oil prices, besides steady global crude oil prices, which could push inflation.
"Its dovish statement was surprising, especially after recent measures to tighten the rupee liquidity and its strong focus on stabilising the currency," Standard Chartered Bank said in a note to its clients.
The rupee's weakness in the late hours was possibly because of the central bank's reservation over the proposed issuance of sovereign bonds on the ground that the cost associated with it might be higher than the benefit.
"A sovereign bond issue would compromise financial stability. So, in RBI's view, the cost of sovereign bond issue, at the current juncture, outweighs the benefits. We should be doing sovereign bond issue, if at all, from a position of strength, at a time when we are a lot less vulnerable," Subbarao said.
The rupee's fall also impacted the equity and bond markets. Bond yields, which fell below the eight per cent mark after the policy announcement, rose as the rupee weakened. The yield on the 10-year government bond 7.16 per cent 2023 ended at 8.25 per cent on Tuesday, compared with the previous close of 8.13 per cent.
Similarly, the equity market also closed weaker, as there was no clarity from RBI on when its liquidity-tightening measures would be rolled back to pave the way for monetary easing.
The BSE Sensex shed 245 points on Tuesday to end the day at 19,348 - 1.3 per cent than its previous close. The NSE Nifty closed 77 points, or 1.3 per cent, at 5,755.
"The rollback of the measures will be data dependent. It is linked to decline in volatility and disorderly movements in the exchange rate. We will also make an assessment of the global markets and see how vulnerable they remain to further announcement or some action," Subbarao said.
"The threat on the stability of the currency is what had led to the decline in equities," said Gopal Agrawal, chief investment officer at Mirae Asset Global Investments (India).
Corporate India drew comfort from the central bank's stance. "We draw heart from the RBI statement saying that had it not been for the volatility, the rates could have been reduced, since inflation had started to moderate. We see this as a softening of stance by RBI," said CII President S Gopalakrishnan.