Rupee fell for a second day on speculation a decline in the benchmark stock index will deter global funds from buying local shares.

The currency, down 2.4% from a nine-year high reached last month, also traded near the lowest in more than a week on speculation refiners stepped up dollar purchases to pay for crude oil imports. The Bombay Stock Exchange Sensitive Index, or Sensex, declined as much as 2.2%,ending a three-day rally.

?There?s another round of nervousness in equity markets that?s having a bearing on the currency,? said Rohan Lasrado, a currency trader at HDFC Bank Ltd in Mumbai. ?The month-end dollar demand from importers is also keeping the rupee weak.?

The rupee declined as much as 0.5% to 41.37 against the dollar before trading at 41.26 in Mumbai, according to data compiled by Bloomberg. It may weaken to 41.40, Lasrado said.

Net purchases of Indian shares by overseas investors reached a record $5.9 billion in July, helping push the currency to the highest since May 1998. The rupee, up 7.3% this year, is Asia?s best performer, Bloomberg data show.

Portfolio managers this month sold $1.8 billion of Indian shares more than they bought, another record.

Bonds may fall on speculation government debt sales and corporate tax payments in coming weeks will drain spare cash from the banking system, leaving investors with less funds to buy debt.

Ten-year securities may decline for a second day as companies must pay their third quarterly installment of advance taxes for the current fiscal year by September 15. Bonds may also fall on concern investors will pull money out of emerging markets as turmoil in global credit markets sends stocks lower.

?Tax outflows and government bond auctions will put pressure on the supply of funds,? and send bonds lower, said K Ramanathan, who manages the equivalent of $900 million of Indian debt at ING Investment Management Pvt in Mumbai. ?The market is also worried about the potential capital outflows due to subprime concerns.? The yield on the benchmark 7.49% note due April 2017 rose 1 basis point to 7.94% as of in Mumbai, according to the central bank?s trading system. The price fell 0.06, or 6 paise per Rs100 face value, to 96.99.