India's rupee plunged to a new low on Friday and stocks fell nearly four percent on fears that foreign capital could flow back to the United States as the US economy improves.
The rupee, one of Asia's worst-performing currencies this year, hit a record of 62.03 rupees to the greenback, slipping past its previous low of 61.80 rupees on August 6.
It recovered marginally to 61.79 to the dollar in afternoon trade.
India's stock markets saw relentless selling pressure, with the BSE benchmark 30-share Sensex index plunging as much as 3.85 percent or 746.20 points -- its sharpest single-day fall in nearly two years -- to a day's low of 18,621.39 points.
The drop reflects fears that recent measures by the Reserve Bank of India may not be able to help slow down foreign fund outflows and the ailing currency, dealers said.
India's markets were closed Thursday, so Friday was the first day the markets reacted to new measures announced by the central bank to control forex outflows and prop up the rupee.
On Wednesday, the RBI said that Indian firms can invest only 100 percent of their net worth abroad, down from an earlier 400 percent.
Resident Indians will be able to send only $75,000 out of the country each year -- down from $200,000 previously -- the bank said on its website.
"(Wednesday's) measures have caused fresh concern, suggesting that one can bring in capital (into India) but it is difficult to take it out," said Sonam Udasi, head of research with investment bank IDBI Capital.
Udasi said investors were worried that despite India's long-term growth potential, "things are not in shape in the interim period".
"This is a panic fall," said Ajay Bodke, an investment strategist with Mumbai brokerage Prabhudas Lilladher, as demand for the dollar has risen on expectations of a scaling back of US stimulus in September.
Since June 1, overseas funds have pulled out a combined $11.58 billion in equities and debt from India's markets, over concerns about the weakening economy, regulatory data shows.
"There is complete lack of faith in the markets. There are fears that the RBI measures may not help improve the rupee," Param Sarma, chief executive with NSP Forex, a consultancy firm said.
The fall for the rupee is part of a wider trend as most emerging market currencies have depreciated in recent months against the dollar, which is strengthening as its economy recovers.
Dealers said there was no immediate sign of an intervention by the RBI to prop up the rupee, which at Friday's low had depreciated 13.2 percent against the dollar in 2013.
The falling rupee stokes inflation by raising the cost of everything India imports from crude oil to chemicals and pulses.
The rupee's woes come as the government is struggling to turn around India's once red-hot economy by pledging new steps to narrow the gaping current account deficit -- the broadest measure of trade -- which hit a record level last year.
The economy grew at a decade-low 5.0 percent in the year to March.
The high current account deficit, slowing domestic growth and weak exports put heavy pressure on the rupee.
The RBI has said until the rupee stabilises it cannot lower borrowing costs to spur a slowing economy.