The decline steepened in recent weeks as rising crude price - India imports two-thirds of its oil needs - and a sell-off by investors in emerging markets cranked up the pressure on the country's external balances.
An expected rate hike would be the Reserve Bank of India's (RBI) third this year, after it lifted borrowing costs in June and August. It has been continuously pressured this year by higher oil prices.
SBI in its research report had said RBI should hike the repo rate by at least 25 basis points to control the value of rupee from falling.
"However, if oil comes down to $75 a barrel, then the rupee is expected to retract significantly against the greenback", he noted.
The rupee collapsed to a fresh low of 73.77 against the U.S. dollar on Thursday, as global oil prices continued to rise, deepening concerns about the current account deficit and capital outflows.
"The panel however, shifted its policy stance to "calibrated tightening" from 'neutral".
Thirdly, global financial markets remained volatile with EME currencies depreciating significantly.
Meanwhile, the BSE Sensex too plunged by 584.53 points, or 1.66 per cent, to 34,584.63 in late afternoon trade.
The 10-year benchmark bond yield fell to 8.08 percent from 8.13 percent before the policy was announced, as traders expected a rate hike were caught wrong-footed.
One underlying concern is that the RBI's selling of dollars to stem the slide in the rupee has drained Rs 1.5 lakh crore from the banks since April.
Anindya Banerjee, deputy vice president, currency derivatives at Kotak Securities, added: "The RBI is ready to keep real rates high because the policy mandate is to anchor inflation".
Other Asian central banks in nations running trade deficits and exposed to portfolio outflows and higher oil prices have shown more urgency in hiking interest rates.