Officials emphasised that the government or the RBI won't revert back to the era of capital controls.
"They (market players) are saying capital controls are coming in. There is no question of us putting any restriction on outflows which are commercial in nature. There is no control of outflows of dividends, profits, royalties, or on any kind of commercial outflows which happen in the normal course, economic affairs secretary Arvind Mayaram told reporters in New Delhi on Friday.
To restrict the outflow of foreign currency, the RBI had on August 14 announced measures, including curbs on Indian firms investing abroad and on outward remittances by resident Indians.
Another senior finance ministry official said the measures taken by the RBI cannot be called capital control measures and they had more to do with reducing stress on the balance sheets of corporates.
"With rising NPAs, corporate houses are getting more and more into difficulties...so looking into their balance sheet before they are allowed to invest abroad is all that has been proposed. Hence, it is not capital control," the official added.
Mayaram reiterated the government's aim was to stabilize the rupee as compared to strengthening it. The government works in a calibrated manner. We are fully cognizant of the situation. Whenever required, policy initiatives will be taken with a view only to create stable environment for rupee. We will see when it is required, and we will take appropriate measures. It does not mean we have any intention of defending the rupee at a particular point, he said.
The rupee hit a lifetime low of 62.03 against the dollar on Friday while the Sensex crashed 769.41 points, its biggest fall in 4 years, to end at 18,598 on fresh concerns about US stimulus withdrawal.
Calling Friday's equity sell-off a result of misinterpretation, Mayaram, said, "It's not the measures we have taken, it's how the measures are seen. Today's sales are not FII, mutual funds or institutional sellout. It's all by brokers. Transmission of information to the broker level is taking much longer so that's why I think there is problem of transmission, therefore there is confusion in the market."
The rupee worry also spills over to the equity markets and the equity worry spills over to the rupee. It is potentially vicious," said the second official, who did not want to be named.
He added that the government and the RBI at present do not want to use their armoury and would rather stick to relatively smaller measures that won't choke growth.
"If the government wants to arrest the fall in the rupee by completely choking liquidity, it is very easy to arrest the fall in the rupee, thereby hurting the growth process," he said.
Later in the day, finance minister P Chidambaram said he expected calm to return to domestic markets and added that investors here should not be affected by fears of a tapering down in the US Federal Reserve's quantitative easing programme as the fundamentals of the Indian economy were very strong.
The Indian markets have taken a hit of two days in one day. This is a time for calm and a time for reflection, Chidambaram said.