The fifth seeded Indian squandered a game advantage to lose to his ninth-seeded opponent 21-18 7-21 16-21 in a 55-minute contest.
London Olympics quarterfinalist, Kashyap opened up a 8-4 lead in the opening game but was caught up by the Malaysian soon. Both were neck on neck for a while before Kashyap broke away to take three straight points from 17-16 and bag the first game.
The decider was a gripping affair with the duo locked at 8-8 after an intense fight which saw none ready to concede ground to the other. Chong reeled off five straight points from 8-8 but Kashyap fought back to level at 13-13 and then 15-15.
Kashyap, however, lost the plot towards the close as he allowed his Malaysian opponent to win five straight points to trail 15-20 before losing the match.
In men's doubles, the Indian duo of Pranaav Jerry Chopra and Akshay Dewalkar was handed a straight-game defeat by the Korean top seeds Sung Hyun Ko and Yong Dae Lee, who won 21-14 21-12.
In the women's singles, top seed Indian Saina Nehwal, who regained her second place in world ranking today, prevailed over Sashina Vignes Waran of France 13-21 21-15 21-12 in a 47-minute match to advance to the pre-quarterfinals.