The BSE Sensex skidded to its lowest close in nearly three weeks on Thursday as investors fled riskier assets on concerns about worsening near-term outlook for the domestic and global economies.
A slumping rupee heightened the prospect of more pain for companies with large foreign debt and kept the pressure on inflation, which has remained above 9 percent for a year.
Finance Minister Pranab Mukherjee said on Thursday India would need to take new policy initiatives to revive slowing growth and control inflation as fiscal and monetary options were increasingly limited.
The 30-share BSE index dropped 0.28 percent, or 44.67 points, to 15,836.47, its lowest close since November 25.
The benchmark, which fell as much as 1.8 percent at one stage, pulled back on expectations the RBI will hold rates at its review on Friday but the overall mood was bearish.
Our focus has now shifted a bit from external events to the domestic economic slowdown and the rupee plunge and its impact on the companies, said Anshu Kapoor, head of private wealth at Edelweiss Global Wealth Management. There are some structural issues here that needs to be addressed and in the absence of that we are in for a very painful period that will test all the market participants, he added.
Leading mobile operator Bharti Airtel (BRTI.NS) was the top loser in the main index, falling 3.5 percent to 336.65 rupees, as the rupee hit another record low, taking the currency's losses to nearly a fifth from its peak in July.
Bharti had $13.2 billion in net debt as of September, mainly due to its $9 billion deal last year to buy most of the mobile operations of Kuwait's Zain and loans taken to finance 3G spectrum and network in India.
Rival Reliance Communications (RLCM.NS), which has a $925 million dollar convertible bond maturing in March, fell 1.9 percent to 69.60 rupees.
With the conversion price of 654 rupees more than nine times its current stock price, the company faces a heavy redemption.
The stock market has been battered this year as stubborn inflation and high interest rates dimmed the growth outlook for the economy and corporate earnings. The global economic uncertainty has also pushed investors away from risky assets.
Foreign funds are net sellers of $300 million of Indian shares this year until Tuesday, in sharp contrast to a record investment of more than $29 billion in 2010.
The BSE benchmark has dropped nearly 23 percent this year, making it the worst performing major global market index, followed by Hong Kong's Hang Seng index .HSI which is down 22.3 percent, Thomson Reuters data showed.
We need to see some policy action by the government and some stabilisation in the rupee before the market comes back again, said Dipen Shah, head of private client group research at Kotak Securities.
Lenders State Bank of India (SBI.NS) and ICICI Bank (ICBK.NS) fell 2.7 percent and 0.8 percent, respectively. A series of rate increases since early last year has worsened the outlook for credit growth and asset quality of local banks.
Infosys, the second-largest software services exporter, shed 0.9 percent on growing worries technology spending by overseas clients could drop due to uncertainty about the global economic growth and override gains from a falling rupee.
The 50-share NSE index closed down 0.4 percent at 4,746.35. In the broader market, there were nearly three losers for every gainer on robust volume of more than 600 million shares.
STOCKS TO WATCH
* Mahindra Satyam (SATY.NS) ended 1 percent higher at 65.80 rupees, a day after Credit Suisse said it had initiated coverage on the company with an outperform rating and a target price of 85 rupees on attractive valuations.
* Adani Power (ADAN.NS) gained 1.2 percent after the company said it planned to synchronise two units each of 660 MW at Tiroda in western Maharashtra state in the current fiscal year.
* Petron Engineering Construction (PEEC.NS) closed up 2.3 percent after the company said it had received orders worth 316 million rupees from Lanco lnfratech.