The rupee dropped to a 15-month low on Tuesday as investors were taken aback by a combination of high crude prices, a record monthly trade deficit and another sharp fall in the stock market.

The local currency ended at 43.34/36 per dollar, taking its fall this year to more than 9%. It briefly fallen to a low of 43.50, it weakest since April 2, 2007. The rupee had ended at 43.025/030 on Monday.

?The rupee weakened today as a combination of the offshore-onshore arbitrage pressure, coupled with capital outflows due to stock market losses,? said U Venkataraman, head of treasury at IDBI Bank.

One-month offshore non-deliverable forward contracts were quoting at 43.89/99 per dollar, 1.25% weaker than the onshore rate.

Dealers said foreign banks bought dollars in the local market to sell offshore and cash in on the high price differential, putting downward pressure on the rupee. India?s trade deficit widened in May to a record $10.77 billion, as the pace of export growth slowed and oil costs surged.

Oil was trading above $142 a barrel after hitting a record $143.67 on Monday. The main share index tumbled 3.7% to a 15-month closing low on Tuesday, taking its losses to more than 10% in just three days, as investors were rattled by oil prices, rising inflation and political uncertainty.

Meanwhile, bond yields rose towards seven-year highs on Tuesday with cash seen tightening later this week and 11% inflation weighing on sentiment.

Heavy rainfall in Mumbai keeping trading volumes low. The 10-year bond yield ended at 8.75%, off an intraday peak of 8.79, but higher than Monday?s closes of 8.69%. Traders see yields rising further in days ahead. ?I expect the 10-year to cross 8.86% by Friday,? a trader with a US bank said. Volumes were low at Rs 1,125 crore on the central bank?s trading platform. Volumes picked up in the afternoon.

The first 25-basis-point stage of the increase in reserve requirements takes effect on Saturday. Adding to the drain on cash, the central bank will auction Rs 10,000 crore of bonds on July 4. Central bank deputy governor Rakesh Mohan said on Tuesday there had been no material change in the factors influencing the economy since last week?s policy tightening.