In line with crash in equities, the rupee tumbled sharply by 82 paise -- its biggest single day fall this year -- to settle at 66.65 against the US dollar as global meltdown fears remained unabated.
The widespread panic sell-off in Chinese equities predominantly tipped emerging market currencies into turmoil even as the US dollar weakened overseas.
A sudden gust of dollar demand from importers and state-run banks in the face of sustained capital outflows amid mounting risks of a hike in US interest rates pressurised the domestic currency to hit fresh two-year low.
Meanwhile, Finance Minister Arun Jaitley and RBI Governor Raghuram Rajan sought to allay fears and said macroeconomic fundamentals of the country are much better than peers.
The local currency resumed sharply lower at 66.47 against last Friday's closing level of 65.83 at the Interbank Foreign Exchange (Forex) market on the back of heavy dollar demand.
Reacting to market specific developments, the domestic unit touched a low of 66.74 in intra-day trade before concluding at 66.65, showing a steep fall of 82 paise, or 1.25 per cent.
It touched an intra-day high of 66.29. The local currency has lost 202 paise, or 3.17 per cent, in last two weeks after Beijing stunned the world by devaluing the yuan.
The dollar extended losses against other major currencies.
The US dollar index, which measures the greenback's strength against a trade-weighted basket of six major currencies, was down 1.12 per cent at 93.78, the lowest level since June 22.
Emerging markets and oil-linked currencies too fell to multi-year lows on concerns over the outlook for global growth against the backdrop of China's shocking devaluation of the yuan last week.
Meanwhile, the benchmark BSE Sensex crashed by 1,624.51 points, or 5.94 per cent, to settle at 25,741.56.
Foreign investors sold shares worth Rs 2,340.60 crore last Friday, as per provisional data from the exchanges.
The steep crash in oil, which hit fresh six and a half year lows on Monday, pushed a broad index of commodity prices worldwide amid heightening global dis-inflationary fears.
Brent, the international benchmark, dropped 2.6 per cent to a low of USD 44.20 a barrel in early trade, the lowest since March 2009.
Veracity Group CEO Pramit Brahmbhatt said, "Global sell-off forced our local equities to trade weak today and registered a fall of almost six per cent for the day taking cues from raising concerns over slow global economic growth."
Also, the rout in Chinese equities further dented investor sentiments. The trading range for the Spot USD/INR pair is expected to be within 66.00 to 67.20.
In the forward market, premium for dollar displayed a steady to firm trend. The benchmark six-month premium payable in January ended virtually steady at 191-193.
However, far-forward contracts maturing in July 2016 firmed up to 415-417 paise as compared to 414-5-416.5 paise previously.
The RBI fixed the reference rate for the dollar at 66.5093 and for the euro at 76.2729.
The rupee slumped against the pound sterling to end at 104.78 from last Friday's close of 103.22 and plunged against the euro to finish at 76.64 from 74.24.
It also plummeted sharply against the Japanese currency to 55.62 per 100 yen as compared to 53.64 previously.
