The rupee is likely to fall sharply on Wednesday in a knee-jerk reaction to the government's decision to tighten external commercial borrowings.

The rupee is expected to trade in the range of Rs 40.55 to Rs 40.70 per dollar against Tuesday's close of Rs 40.41 per dollar.

According to R V S Sridhar, head, markets, at Axis Bank (formerly UTI Bank [Get Quote]): "The market had factored in inflows of around $25 billion on account of ECBs. While $4 billion to $5 billion is reported to have been brought in, there is doubt over the rest of the inflows. Now that the market will have to factor in this constraint on forex inflows, the spot rupee may depreciate to 41.20-41.80 in three to four months."

Before Tuesday's announcement, the market was expecting the rupee to breach 40 and rule around 39.90-40 to a dollar in the short term.

N S Paramsivam, head of forex and treasury of the Essar Group, said the rupee might touch 40.75 on Wednesday and rule at 41-41.50 to a dollar in three to six months.

He said over a time-frame of one year, exporters and companies would sell their dollar proceeds since the bias towards rupee appreciation would remain strong.

The rupee had already opened in the overseas non-deliverable forward market at 40.70/40.75 against the dollar for a one-month period after the government's announcement, a dealer said.