India's rupee rallied the most in 1 1/2 years and stocks recovered after an official said the government may announce measures to support the currency after a planned review of the economy by Prime Minister Narendra Modi this weekend.

The government is not ruling out an increase in interest rates, the official told reporters in New Delhi, asking not to be identified citing rules. The rupee has set one record low after another amid a selloff in emerging-market currencies and concern about India's widening current-account deficit.
"The market is seeing a temporary relief and moving on hope,"  said Sajal Gupta, head of foreign-exchange and rates at Edelweiss Securities in Mumbai. "If the government's moves are credible, we will see the rally continuing. If the moves aren't credible, the pain will return very swiftly."

The rupee strengthened as much as 1.1 per cent to 71.92 per dollar after hitting a new low of 72.9138 in early trading. The S&P BSE Sensex gauge of stocks rebounded as much as 0.9 percent and benchmark 10-year bond yields dropped five basis points to 8.13 percent.

Read: What steps the policy makers can take to calm the rupee and markets
The rupee has slid 11 percent this year in Asia's worst performance, and the losses have begun to hurt sentiment in the nation's stock and bond markets as well. The Sensex tumbled 2.5 percent in two days to Tuesday, the most since February, and the benchmark yield rose to 8.23 percent, the highest since November 2014.

The selloff has come amid surging oil prices - India's biggest pain point - and threatens to stoke inflation, worsen the government's finances and impinge on companies borrowing costs. That aggravates a negative spiral for Asia's third-biggest economy which boasts of world-beating growth of over 8 percent. Global funds have pulled $733 million from local bonds so far in September and $133 million from shares this week.

The currency's persistent weakness has prompted authorities to ask the central bank to intervene more aggressively to stem the slide, people familiar with the matter said on Tuesday. The government may take teps including introducing a deposit plan for overseas Indians, another finance ministry official said.

"Traders making hay selling the rupee and shorting equities are now being forced to cover their bets after the news of government intervention,"  said Sanjiv Bhasin, executive vice president at India Infoline Ltd. Stocks were extremely over sold, he said