The Indian rupee's drop to a record low on Friday prompted international investors to reconsider their frenetic buying of the country's assets, resulting in the largest selloff in Indian bonds in a year.

Global funds sold a net of $425.3 million in rupee-denominated bonds on Friday, according to the most recent data from government depositories. Selling was focused on index-eligible government bonds, with foreign holdings falling by 38.81 billion rupees ($466 million) on the day, according to data from India's Clearing Corporation. 

The selloff occurred on the day that the rupee plunged the most in six months. Investors' swift portfolio reconfiguration demonstrates how they handle currency risk amidst a strong appetite for the fast-growing economy's assets.

Given the Reserve Bank of India's efforts to keep the rupee in a tight trading band, outside investors may have purchased Indian assets with little regard for currency risk hedging. Philip McNicholas, Asia sovereign strategist at Robeco Group in Singapore, believes the currency's low volatility may have left investors with exposed unhedged holdings.

"Offshore investors may have wanted to limit potential losses on what is still an off benchmark position," he pointed out. "Much the same way you see equity selloffs on such days."

Foreign funds have flocked to Indian debt ahead of its inclusion in JPMorgan Chase & Co's global bond indexes in June, with roughly $10 billion inflows into the so-called Fully Accessible Route bonds. The rupee's stability, which ranks among the least volatile in emerging markets, has contributed to its attraction.

"We expect the RBI to smooth volatility," Macquarie Capital strategists including Trang Thuy Le wrote in a note. "But with INR having outperformed recently and crowded positioning, it is possible that the RBI may allow some further upside to USDINR to 84-85 range, before engaging in heavily." The rupee has declined 0.1% on Wednesday to 83.3275.