BSE Sensex
BSE Sensex Reuters

Foreign institutional investors, or FIIs, withdrew nearly $5 billion from Indian markets in the last three weeks as fears about the future of the U.S. Federal Reserve's bond-buying program led to a liquidation in bond holdings across emerging economies, while the Indian rupee continued to remain weak despite assurances from the finance minister.

FIIs turned sellers in June taking away $4.2 billion from bonds and $850 million from equity markets in India, after a plunging rupee narrowed bond yield spreads between India and the U.S.

On Monday, the BSE Sensex, India's benchmark stock index, was down 0.85 percent in early trade, on Monday, and the rupee declined 0.56 percent on Monday to trade at 59.60 by late morning, after closing at 59.27 on Friday.

The rupee, which hit its all-time low of 59.98 last Thursday and has depreciated by more than 10 percent since April 30, has weakened against the greenback as the U.S. dollar continues to strengthen against major counterparts after last week's Fed meeting when Chairman Ben Bernanke announced the bank may stop its bond-buying program by mid-2014.

The rupee, which fell again to 59.98 on Friday in intra-day trade, had recovered slightly after India's Finance Minister P. Chidambaram said the Reserve Bank of India, or RBI, will take action whenever necessary.

“We are watching the situation; RBI will take whatever action it has to take. We have good economic advisors. We will do whatever has to be done ... My request is you should not panic, it's happening around the world,” he was quoted as saying at a press conference on Friday, by Press Trust of India.

Overseas investments in India hit a two-year high during 2012 with FIIs investing $22.2 billion, and investors had been aggressive in the first five months of this year due to higher yields. In 2013 so far, FIIs have poured nearly $14 billion into Indian markets.

CLSA's Rajeev Malik told "Given the recent outsized rupee move, it will find some near-term respite because of more measures to encourage capital inflows and the anticipated improvement in the CAD (current account deficit),"

However, he expects the rupee to depreciate further against the dollar in coming months and clear 60 in early 2014, and possibly fall to a 62-65 a dollar range.