The rupee fell the most in two months after the Trinamool Congress, Prime Minister Manmohan Singh's biggest coalition partner, said it would quit the government over policy changes announced last week.
"The Indian reforms are still work in progress and there are some concerns as to whether politics will come in the way," said Thio Chin Loo, a senior analyst at BNP Paribas SA in Singapore. "The markets are worried about the possibility of a rollback."
The rupee declined 0.7 per cent from September 18 to 54.3850 per dollar in Mumbai, the biggest drop since July 23, according to data compiled by Bloomberg. The market was shut yesterday for a holiday. One-month implied volatility, a measure of exchange-rate swings used to price options, fell 25 basis points, or 0.25 percentage point, to 10.25 per cent.
10-year bond yield drops
India's 10-year sovereign bonds gained, pushing the yield to a two-week low, as speculation the government will lose its majority increased the allure of safer investments such as government debt.
The yield on the 8.15 per cent notes due June 2022 fell one basis point to 8.16 per cent, the lowest level since September 6, in Mumbai, according to the central bank's trading system.
Prime Minister Manmohan Singh's government announced September 14 that it would permit foreign investors to own 51 per cent in retail ventures and buy as much as a 49 per cent stake in the nation's airlines, while also increasing diesel prices for the first time since July 2011.
Call money rate higher
The overnight call money rate finished higher at 8.08 per cent from 8.05 per cent previously, it moved in a range of 8.10 per cent and 8.00 per cent.