Shares fell about 2% on Monday in broad-based selling as investors shunned equities on renewed worries over global economic growth.
The NSE Nifty 50 index fell 1.8% to 17,019 as of 0503 GMT, while the S&P BSE Sensex dropped 1.6% to 57,178.77.
The sterling slumped to a record low on Monday as investors piled in to dollars and out of almost everything else, spooked by the prospect of high interest rates and poor growth ahead.
The rupee sank to a fresh record low on Monday at 81.575 against the U.S. dollar.
Last week, the United States and half a dozen other countries raised interest rates.
Meanwhile, the Reserve Bank of India is set to raise interest rates again this week with a slim majority of economists in a Reuters poll expecting a half a percentage point hike and some others expecting a smaller 35 basis point rise.
"The selling is basically driven by global cues, which remains weak. Market is already building in a 50 basis points hike from the RBI this week," said Gaurav Dua, head of capital market strategy at Sharekhan.
"Earlier it was expected that the RBI will take a pause. However, given the firming up of food prices, market is now building another 35 basis point hike after this, which is affecting sentiment," Dua said.
Analysts also flagged that foreign investor selling might take the cushion off the markets. Foreign institutional investors sold net 29 billion rupees ($355.57 million) worth Indian equities on Friday as per provisional data available with the National Stock Exchange.
The Nifty metals index fell 4.2%, auto index dropped 3.7%, while the energy and bank indexes were down 3.1% and 2.4%, respectively.
Nestle India was the top gainer in Nifty 50 index, rising 1.6%, while Hindalco Industries fell the most, with 6% drop.
Shares of precision engineering company, Harsha Engineers jumped 47% on their debut in Mumbai markets.
