India's rupee hit a new record low against the dollar Thursday, on concerns the US Federal Reserve would scale back its stimulus programme that has pumped billions of dollars into global markets.
The rupee hit 59.93 in morning trade, well below its previous record low of 58.98 reached last week, prompting the Indian government to move to allay investor concerns over the currency.
"The markets may be over-reacting as they tend to do in such times," the finance ministry's chief economic adviser Raghuram Rajan said.
"We are not short of action or instruments as and when the need arises," Rajan told reporters in New Delhi.
The rupee has been hard hit recently, in part on concerns about Asia's third largest economy, which has been growing at a decade low of 5.0 percent, as well as worsening public finances and political turmoil.
India's benchmark Sensex index also fell more than two percent to 18,856.83 points, on fears of overseas fund outflows from India.
Trading in Indian government bonds also halted briefly Thursday, after yields breached set limits, but resumed later.
Federal Reserve chairman Ben Bernanke said on Wednesday that the bank could begin to wind down its key stimulus programme later this year, signalling a growing confidence in the US economy.
By noon, the rupee recovered marginally to 59.82 on reports that India's central bank possibly intervened to prop up the currency by selling dollars.
"The verdict is clear, we are likely to enter a new territory (for the rupee)," said Abhishek Goenka, chairman of advisory firm India Forex.
Goenka feared the rupee would weaken further, to 61 levels in the near-term, but said intervention from India's central bank was unlikely.
Analysts say the Reserve Bank of India (RBI) cannot intervene heavily to buttress the currency as it must retain enough foreign reserves for imports. It only has sufficient reserves for seven months of imports -- the lowest cover in 13 years.
Officials confirmed last week that the RBI had intervened to halt the slide after it reached the previous record low on June 11.
The RBI has a policy of not commenting on movements in the foreign exchange market and of intervening only to curb volatility.
The weaker currency makes imports costlier, especially of foreign oil on which India heavily relies, and will stoke already high consumer inflation.