Indian stocks fell sharply by nearly 1,000 points to a three-year low in the opening session of trading on Friday, registering a drop of nine per cent.
The benchmark Sensex fell below 10400 points in early trade before making a partial recovery.
The crash also affected the rupee which fell to 49 against the US dollar.
Meanwhile, the Reserve Bank of India (RBI) has cut the cash reserve ratio for banks to 7.5% to help generate more cash in the banking system.
It could make more than $12bn of credit available in an effort to resolve the liquidity crunch, the BBC's Prachi Pinglay in Mumbai (Bombay) says.
Traders say the market is responding to the global markets and the cut in the cash reserve ratio will help reduce the impact of the global crisis.
Some Indian traders fear that many foreign institutional investors, faced with increased problems at home and an unwillingness to take on extra risks, will sell their emerging market holdings and leave the market.
According to official figures, foreign funds have sold shares worth $879m (Ј445m) in the four days to Thursday, taking total outflow in 2008 to $4.8bn.
Some traders say the figures show that foreign investors are "queuing up to exit" the Indian market.
(BBC)
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