India's central bank promised on Friday to use "all its available tools" to stabilise the rupee, which sank to a record low against the dollar for a third straight day amid turmoil in global markets.
The Indian unit fell to 54.91 against the dollar, below its previous low of 54.58 a day earlier, before clawing back to 54.4 in late afternoon trade.
Asian shares and currencies fell after Moody's downgraded 16 Spanish banks on Thursday, while poor US manufacturing data heightened concerns over the global economy.
The central bank "will use all its available tools to fulfil its objective of curbing volatility in the foreign-exchange market", the bank's deputy governor Subir Gokarn told reporters in the eastern Indian city of Kolkata.
"The central bank will not hesitate to take more steps to stem the falls in rupee, if needed," he said.
But analysts and traders expect the rupee to fall further in coming days with risk aversion hitting global markets and sentiment souring over India due to its gaping trade and current account deficits and slowing economy.
"The rupee is in a freefall. Unless the RBI (Reserve Bank of India) and the government take major steps to boost sentiment, there are more worries ahead," said Abhishek Goenka, chief executive of India Forex, a consultancy firm.
India's central bank is suspected to have intervened on Thursday to help prop up the rupee in one of more than a dozen recent occasions it has sold dollars to help slow the decline of the currency.
Last week, it announced new measures to support the local unit, ordering exporters and other foreign-exchange earners to convert half of their total foreign-exchange earnings kept in banks into rupees.
Finance Minister Pranab Mukherjee this week blamed the deteriorating international climate for the falls as international investors sell risky emerging market assets and retreat to safe havens.
Other emerging currencies from Indonesia to Brazil have also been hit.
Foreign investors have been turned off the country of 1.2 billion people due to recent regulatory moves by the government, which has stalled on a pro-growth reform agenda aimed at opening up the economy.
Overseas funds withdrew a net $133.44 million worth of Indian equities in the new financial year, which started April, pulling down local share prices seven percent in the same period.
The falling rupee is bad news for India's economy, pushing up import prices and aggravating inflation that is running at over seven percent, limiting the central bank's scope to roll back interest rates and spur the economy.
It will also further strain the government's budget because oil imports -- which are priced in dollars -- will become more expensive.
The central bank said recently it had spent more than $20 billion in spot-market intervention between September and the end of February. Analysts estimate a further $5 to $7 billion to have been pumped in since.
The rupee was Asia's worst performing currency in 2011, losing more than 20 percent of its value in the calendar year.