Weakness in domestic equities also dragged the rupee lower, with the Indian currency not far from its record intraday low of 77.7850/$1.
At 9:20 am, the Sensex was down almost 1,000 points, while the NSE Nifty was down more than 300 points.
The partially convertible rupee was last at 77.6780/$1 as against 77.5800/$1 at previous close.
The dollar index, which measures the US currency against six major rival currencies, headed back to the 104 mark, rising to a high of 103.85 on Thursday. The index was hovering around 103.20 at the end of Indian trading hours on Wednesday.
The rupee has taken a beating along with several other emerging market currencies this week as signs of a growth slowdown in China have stoked fears of a global recession at a time when the US Fed has signalled multiple rate increases.
The prospect of higher US interest rates and the global wave of risk aversion have exacerbated what was already an unprecedented bout of selling pressure displayed by overseas investors in Indian equities.
A depreciating rupee eats into the returns that foreign investors earn from Indian assets.
Foreign institutional investors have net sold more than Rs 30,000 crore of domestic stocks so far this month, taking their total sales so far in 2022 to a whopping Rs 1.6 lakh crore.
While the Reserve Bank of India is expected to step in to curb excessive volatility in the rupee, as it has done so for the last couple of months, currency traders were of the view that the central bank would permit an orderly depreciation of the currency, given the headwinds of higher oil prices and an aggressive Fed.
“Domestically, the impact of the major fall in the US equities overnight will be reflected in the negative sentiment for the local equities and thus add pressure on the Rupee, besides major concerns of higher inflation, higher crude oil prices, and FII outflows,” CR Forex Advisors MD Amit Pabari said.
“RBI’s intervention near 77.80-77.90 will be closely watched as it has to let the currency depreciate reflecting global weaker fundamentals. Overall, we expect the rupee to trade in a range of 77.30 – 78.50 in the short term.”