The rupee hit a nearly 1-1/2 year high against the dollar on Monday, tracking gains in Asian currencies after U.S. President Donald Trump's failure to pass a healthcare reform bill raised concerns about the chances of a U.S. fiscal stimulus.
The Reserve Bank of India stepped in to cap broader gains in the rupee, traders said, adding that some of the gains were also due to the strong $6.1-billion foreign investment into debt and equities this month.
The gains in the local unit spurred by strong dollar inflows helped spark a rally in bond markets, sending the benchmark 10-year bond yield down as much as 12 basis points to 6.71 percent, the lowest since Feb. 8 when the central bank unexpectedly changed its monetary policy stance to "neutral" from "accommodative."
However, shares fell as software services exporters and drug makers were hit by worries about the impact of a stronger rupee. The broader Nifty was down 0.75 percent at 9,039.60 by 0635 GMT, while the benchmark Sensex was 0.69 percent lower at 29,218.19.
Movements in India broadly tracked regional markets after Trump's inability to get enough support from his own Republican Party to reform healthcare was seen raising questions about his ability to push the rest of his agenda.
"Both global and domestic factors are riding the market today," said Vinod Nair, head of research at Geojit Financial Services.
At 0656 GMT, the rupee was trading at 65.0575 after earlier strengthening to as much as 65.01 per dollar, the strongest level since October 2015.
The rally in the rupee sent IT shares lower, with Tech Mahindra Ltd down 2.2 percent and HCL Technologies Ltd down 1.9 percent.
Drug makers also fell, with Lupin Ltd and Aurobindo Pharma Ltd falling 2 percent and 1.8 percent respectively.
Among other decliners, Reliance Industries Ltd fell as much as 2.42 percent after the Securities and Exchange Board of India accused the company of having committed a "fraud" in taking a short trading position at the time of selling a stake in a unit 10 years ago.
Reliance strongly denied the ruling and said it would appeal.
Energy major Coal India fell as much as 2.5 percent, as the second interim dividend announced by the mining firm disappointed investors.
