The broad-based selloff in emerging markets has pushed the Indian currency into free fall, underscoring the need for investors to tread more cautiously.
The rupee has slumped 11 percent this year, touching a record low this week, as investors have pulled cash out of emerging markets on concern the Federal Reserve will ease up on its monetary stimulus as soon as next month. Better growth prospects in the U.S. relative to developing economies have further exacerbated the move away from emerging markets.
"For emerging markets, this is the biggest stress test since Lehman Brothers," Nicholas Spiro of Spiro Sovereign Strategy said of potential Fed tapering. "Clearly now, investors are forced to become more discerning."
Countries including India, Turkey and South Africa have seen their currencies, stocks and bonds hit hard because of their large current account deficits. That makes them more vulnerabie to the withdrawal of Fed stimulus and the resulting rise in capital costs. Other countries, like Russia, which run surpluses are more immune.
(Read more: Wild swings? Emerging currencies have it the worst)