on Thursday showed short positions in the Indian rupee have hit the highest in two months amid sustained doubts over policymakers' ability to stabilise the currency.
The weakness on Friday also reflected a firmer dollar in Asia amid uncertainty about the US Federal Reserve's stimulus withdrawal after upbeat US jobless claims data on Thursday suggested an early end to the Federal Reserve's asset purchases.
The benchmark 10-year bond yield surged 16 basis points to 8.66 percent from its previous close after US Treasury yields jumped to two-year highs.
Measures to restrict capital outflows come as overseas investments from India had already been on the wane, averaging a monthly $400 million in the first half of the year from $710 million in 2012, according to DBS data.
To prop up the rupee in the near-term, markets would need assurances that India can attract foreign flows in an increasingly difficult global environment.
Foreign investors have sold a net $11.6 billion of Indian debt and equities since late May.
India last month unveiled plans to further ease restrictions on foreign direct investment (FDI) in sectors such as telecoms and defence.
Although the government hopes its latest reforms attract long term capital flows, previous measures have had mixed results. FDI fell to $36.9 billion in the fiscal year ending in March from $46.6 billion the previous year.
The RBI on Wednesday also eased some of the rate limits for deposits targeted at non-resident Indians (NRIs), though that is also seen as unlikely to attract inflows in the near term given that NRI deposits have seen net withdrawals of $1.1 billion in May and June, according to DBS.