MUMBAI: Fear stalked markets on Friday as frightened investors pummelled stocks and the rupee after the government's latest firefighting measures stoked speculation about stricter measures on foreign flows and pushed the country's leading stock market indices to a two-year low.Edgy foreign investors dumped stocks worth Rs 563 crore, continuing a wave of selling that began in end-May after US Federal Reserve Chairman Ben Bernanke hinted at rolling back some of the excess liquidity sweeping global markets by cutting his $85-billion-a-month bond purchases. Foreign institutional investors have sold Rs 15,600 crore of stocks since the beginning of June.The Sensex plunged 769 points, or almost 4% - the most in two years - to 18,598 while the Nifty lost 234 points, or 4.08%, to 5,507. The indices have lost 4.26% and 6.73%, respectively, since the beginning of the year.The rupee, Asia's worst-performing currency this year due to a widening current account deficit, breached the 62 mark to the dollar before ending at 61.71, down 0.4%. The yield on the benchmark 10-year government bond rose to a near-two-year high of 8.85%, indicating higher interest rates for consumers, the economy and companies.Market experts preached caution and warned of more pain for investors while in Delhi the government, which has been fighting what some would term a futile war against the market, hunkered down in crisis mode and tried to calm nerves by saying that no capital control measures are being contemplated against foreigners. The Reserve Bank of India did its bit to address concerns and a senior official of the central bank told a select meet in Delhi that restrictions on overseas investments announced on Wednesday night were only aimed at domestic investors.But it may do little to improve sentiment with Mark Mobius, world famous investor and head of Templeton Asset Management, telling a television channel in the afternoon that a sovereign downgrade was a possibility. Rating agency Moody's downgraded three state-owned firms citing worsening macro-economic fundamentals and high inflation on Friday, and India's VIX, a gauge of traders' expectations of volatility, hit 23.64, its highest in more than a year. Both the Sensex and Nifty are trading below their 200-day moving averages (DMA), a major bearish signal."Nifty is headed towards 5,000 levels in the near term," warned Shankar Sharma, a leading market expert and a prominent bear. "FIIs are feeling very uncomfortable about Indian markets at the current juncture," said Nirmal Jain, chairman of IIFL, a brokerage.Stocks were ravaged across the board with many blue chip stocks such as Larsen & Toubro, State Bank of India and Grasim Industries crashing to 52-week lows. The BSE midcap index slumped 2.71%. The index has fallen 23.53% so far this year. ET had front-paged an analysis in its edition dated August 6 which pointed to an impending crash in the markets last week, and followed it up with a report on August 13 on how the mid-caps had been battered much more than the large-caps.Morgan Stanley's top strategist Ridham Desai picked out the winners and losers from the carnage for retail investors. Based on the recent changes in institutional ownership, change in ownership, sell-side ratings, change in ratings, earnings revisions, trailing performance and change in relative valuations, it appears that Lupin, TCS, Tata Motors, HCL Tech and ITC are the stocks where the consensus is most bullish, he wrote.“SBI, Jaiprakash Associates, Tata Steel, BHEL and HUL are the stocks where the consensus is most bearish,” he added.The government, led by Finance Minister P Chidambaram, has been trying to calm investors since Bernanke’s May speech and simultaneously bring down the current account deficit, which has been the top concern for multinational investors. On Friday, Chidambaram told reporters that markets have taken a hit the world over, and the impact on India has been more severe due to Thursday’s Independence Day holiday.“We must remember that jobless claims in the US, if they have come down or they go up, has really no relevance or impact on the Indian economy,” he said, referring to American jobless claims that slumped to a six-year low last week. “Let’s wait to see what first quarter growth rates are. I have no doubt in mind (that) when calm is restored in market, people will begin to understand that Indian market indicators must basically reflect Indian market conditions,” he added. But the efforts seemed to have had little impact. The Sensex has lost 5.88% since June 1 and the Nifty, 7.99%. The rupee has lost 8.71% during this period.“There is a tremendous downward pressure in the markets. So far, we have only seen modest selling by FIIs. Unless the rumours are quelled soon, a selling spree could commence,” said UR Bhat, managing director at Dalton Capital Advisors.Fund managers fear further capital restrictions would scare off foreign investors at a time the expected tapering of US monetary stimulus programme is already creating uncertainty in emerging markets.“Right now, we would like to advise investors that capital preservation should be the only goal. We expect flat or modest earnings growth for corporate India this year,” Shankar Sharma, global trading strategist at First Global, told ET NOW.India’s largest engineering and construction company, L&T plummeted 5.19% to a 52-week low of Rs 756, while India’s biggest lender, State Bank of India touched plunged 3.32% to Rs 1571. Private sector bank Axis Bank crashed 8.23%, after the MSCI excluded the bank from its standard and large cap indexes.Index heavyweights such as Reliance Industries, ICICI Bank, HDFC and ONGC crashed 4.5%-6%. BHEL was the worst performer, falling 10.97% to Rs 105.55, followed by Jaiprakash Associates, which slumped 10.94% to Rs 29.70. The two stocks have fallen 53.59% and 69.32%, respectively, since the beginning of the year, making them the worst performers in Nifty.Among mid-caps, Ruchi Soya fell 19.94% to Rs 37.55, Anant Raj Industries slipped 11.77% to Rs 43.10, Future Retail fell 11.61% to Rs 79.55, while YES Bank fell 11.55% to Rs 258. Titan Industries, one of India’s largest jewellery and watch makers, tumbled 11.98% after RBI banned imports of gold coins and medallions, and asked domestic buyers to pay cash for gold.Max India, Grasim, L&T, SBI and JSW Steel all fell to 52-week lows.Some fund managers, however, believe this is the opportune time to invest in markets as they are attractively valued.“There are a large number of good-fundamental stocks that are available at attractive valuations. This is probably one the best times to invest in equity markets with a long-term horizon,” said Navneet Munot, chief investment officer at SBI Mutual Fund.