Rupee fell for the second day on speculation overseas investors reduced local equity holdings after the benchmark stock index reversed an advance.

Concerns that the impact of US subprime mortgage losses may be spreading prompted overseas funds to pull back some of their investments in Indian equities. Overseas funds? purchases of stocks this year have exceeded those for the whole of 2006 as the government spends more on infrastructure to lift growth.

?The stock market development has dented the outlook on the rupee,” said Vikas Babu, a trader with state-owned Andhra Bank Ltd in Mumbai. ?The rupee will be under pressure now.?

The rupee fell to 40.5425 against the dollar Mumbai, from 40.5275, according to data compiled by Bloomberg. The currency rose to as high as 40.3913. The benchmark stock index dropped 1.4% after rising as much as 1.5%.

Global fund managers have sold $617 million of Indian equities more than they bought this month through August 7, according to the stock market regulator. They net bought $4.53 billion worth of stocks in July. The local currency also fell on speculation the central bank will buy dollars.

The Reserve Bank of India raised the limit on the sale of so-called market stabilization bonds, used to drain surplus cash, for the third time this fiscal year.

That suggests it may buy dollars and simultaneously drain the rupees it injects in the banking system by selling stabilisation bonds, to prevent inflation from quickening.

?The central bank?s move suggests it doesn’t intend to let the rupee appreciate and help exporters,?said LV Prasad, chief currency trader at IndusInd Bank Ltd in Mumbai.

?It has leveraged itself for interventions. That will avoid investors from building speculative rupee positions and help the dollar.?

The central bank may drain as much as $37 billion in the year through March 31, it said yesterday after the close of trading in the currency market. It had raised the limit on April 27. India?s exports of goods, which account for about 12% of the nation?s $854 billion economy, grew 14% in June, the slowest pace in three months. That was probably because the rupee gained 9.2% this year, making it the best performer in Asia.