The rupee slumped as much as 1.6 percent to 64.13 to the dollar, adding to its 2.3 percent rout on Monday, before traders said the RBI was seen stepping in to sell dollars.
Markets are bracing for further losses, with 1-month non-deliverable forward trading at 64.71.
A spate of measures by the central bank and government has failed to halt the slide, with liquidity tightening measures aimed at making it harder to short the currency pushing up borrowing rates and battering corporate and investor sentiment.
The BSE Sensex fell 1.2 percent to an 11-month low. JPMorgan downgraded Indian equities to "neutral" from "overweight", citing strain in the country's balance of payments, while Citi lowered its Sensex target to 18,900 from 20,800.
"India's problems are nowhere near resolution because New Delhi has not done anything - there is no focus on improving productivity, infrastructure or getting FDI (foreign direct investment) back," said Nomura credit analyst Pradeep Mohinani in Hong Kong.
"It's all about stemming the flow of currency and that is not the cause of the problem," he said.
Late on Monday, the Reserve Bank of India increased the foreign direct investment cap in asset reconstruction companies to 74 percent from 49 percent.
Earlier on Monday, India banned the duty-free import of flat-screen TVs from August 26.
The 1-month onshore forward rate for the rupee was at 64.47 while the offshore non-deliverable forward was at 64.71, an unusually wide gap that reflected bearish overseas bets against the partially convertible currency.
Emerging market currencies have been under growing pressure from outflows amid expectations the U.S. Federal Reserve will soon start to wind down its super-easy money policy, possibly as early as next month.
Indonesia's rupiah, Brazil's real and South Africa's rand have also been in retreat as investors eye those countries that are most vulnerable to an exodus of foreign capital.
WEAK GOVERNMENT, WEAK GROWTH
Prime Minister Manmohan Singh's weak coalition government, heading into national elections by next May, has been hamstrung from pushing through reforms to attract more long-term capital.
The rupee's plunge adds to worries about India's ability to fund a record high current account gap and whether Finance Minister P. Chidambaram will be able to meet his goal to pare the fiscal deficit to 4.8 percent of gross domestic product (GDP) this fiscal year.
Rating agency Moody's said that while the rupee depreciation was a new variable for the economy, the factors underpinning it have been incorporated in its investment grade rating for India.
India is at the lowest investment-grade sovereign rating.
"We believe that meeting the fiscal deficit target will be very challenging this year, given lower than anticipated growth holding back revenue growth and steep rupee depreciation raising the subsidy bill on imported goods," analyst Atsi Sheth said in an e-mailed reply to queries from Reuters.
Bond yields remained at pre-Lehman Brothers-crisis levels for a second straight day. The benchmark 10-year yield was up 20 basis points at 9.43 percent.