The Indian rupee plunged to a record low against the dollar on Monday while the benchmark NSE Nifty 50 index fell by more than two per cent, ahead of an expected United States interest rate hike this week aimed at fighting surging inflation.

The rupee hit 78.28 per dollar for the first time as a forecast-beating US inflation report on Friday heightened prospects for a further tightening of monetary policy by the Federal Reserve.

The Indian currency has been weighed down by rising oil prices, a more aggressive Fed and by capital outflows in emerging markets as foreign investors turn risk-averse.

Central banks have adopted more hawkish policies in recent months, including in India, with the Reserve Bank hiking borrowing costs by 50 basis points last week for the second time in as many months.

The RBI earlier announced an out-of-cycle 0.4pc rate rise in May.

India's central bank has also been selling off foreign currency to stabilise the currency.

The benchmark 10-year bond yield was trading at 7.59pc, after touching 7.61pc, its highest since Feb 28, 2019, Reuters reported. The 10-year yield ended the day at 7.52pc on Friday.

Inflation has also jumped in India owing the fallout from the Ukraine war, overshooting the central bank's 2-6pc target range from January to April.

It hit an eight-year high of 7.79pc in April, fanned by a spike in food and fuel costs.

In May, the government banned exports of wheat, with yields already hit by a heatwave, to rein in prices.

Sugar exports were also capped to safeguard supplies, while the government cut duties on fuel and edible oils.

Inflation fears hammer Indian shares

On Monday, Indian shares fell 2.5pc as US inflation data and a Covid-19 warning from Beijing roiled global markets, with traders in Asia's third-largest economy waiting for May consumer price data for further cues.

The NSE Nifty 50 index was down 2.5pc at 15,785.05, as of 0509 GMT, with all constituents trading lower. Earlier in the session, it fell as much as 2.8pc to a four-week low. The S&P BSE Sensex sagged 2.6pc to 52,874.03.

"Inflationary pressures are real and recent earnings by US companies have shown that it has become difficult to pass on that high inflationary pressure," said Saurabh Jain, assistant vice president at SMC Global Securities. "Investors fear that we are heading to a recession."

All eyes are now on India's retail inflation data due later in the day. A Reuters poll found that the consumer price index slipped modestly in May, but stayed well above the Reserve Bank of India's upper tolerance limit for a fifth consecutive month.

Asian stocks dropped over fears that the US Federal Reserve would tighten its policy more aggressively after data released last week showed the consumer price index hit its highest in over 40 years last month.

Adding to investors' concerns, Beijing's most populous district of Chaoyang announced on Sunday three rounds of mass testing to quell a "ferocious" Covid-19 outbreak.

IT stocks dragged the Nifty 50 lower, with Infosys Ltd and Tata Consultancy Services shedding 3.3pc each. The Nifty IT index dropped 3.4pc.

Bajaj Finserv and IndusInd Bank were the top losers on the NSE, declining about 5pc each. The NSE bank index sank 3.5pc.