The rupee closed at 83.53 against the U.S. dollar, down 0.47% on the day, its worst single-day percentage fall since February last year.
The Reserve Bank of India (RBI) likely stepped in to limit the rupee's decline, traders said. State-run banks were spotted offering dollars near 83.50 levels, likely on behalf of the RBI.
The sales were intended to plug likely outflows instead of pushing the dollar-rupee pair lower, a foreign exchange trader at a large private bank said.
Indian equity indices plunged on worries about the election outcome. The Nifty 50 Index had its worst day in over 4 years and Indian bond yields rose.
Markets reacted negatively due to the smaller-than-expected mandate and (PM Modi's) Bharatiya Janata Party not achieving a majority on its own, Shreya Sodhani, regional economist at Barclays Bank said.
"The government is still likely to be stable, but markets will likely take a while to gain confidence in the new government," she added.
Modi was well short of the landslide predicted in exit polls, the Election Commission of India website showed.
The worry for Indian markets was that a slimmer mandate for the Modi-led alliance could hamper the undertaking of more economic reforms.
Meanwhile, the dollar index rose 0.2% to 104.3 while most Asian currencies rose, with the Thai baht up 0.6% and leading gains.
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