The benchmark BSE Sensex dropped 162.35 points to close at 34,184.04 today as inflation worries resurfaced following comments of new US Federal Reserve Chair Jerome Powell.
Also, banking stocks led by Axis Bank, Yes Bank, ICICI Bank and HDFC Bank took a hit after the finance ministry set a 15-day deadline for banks to take pre-emptive action on operational and technical risks, following a USD 2 billion fraud at Punjab National Bank.
In addition, sustained capital outflows and the rupee continued to trade at 3-month low of 65.31 against the US dollar, down 44 paise during the day, weighed on sentiments.
Investors turned cautious ahead of a series of macroeconomic data, brokers said. Industrial production (IIP) and December quarter GDP growth numbers were set for release later in the day.
Market sentiment suffered a jolt after other Asian markets closed with widespread losses and European markets dropped in early trade, tracking a slump in the US stocks overnight after the US Fed chair revived worries about a sharp increase in interest rates.
A weaker-than-expected economic data from China and Japan also dampened the mood further.
The Sensex resumed lower at 34,156,63 and dropped further to a low 34,076.45 due to heavy selling pressure in view of foreign capital outflows and lower global cues before closing
at 34,184.04, a loss of 162.354 points, or 0.47 per cent.
The gauge had lost 99.36 points in the previous session.
The broader Nifty dipped below the key 10,500-level to touch a low of 10,461.55 and finally concluded 61.45 points, 0.58 per cent down at 10,492.85.
Fresh spell of selling dragged down most of the sectoral indices, led by metal, banking and FMCG, capital goods, power and infrastructure ended in the negative zone, falling up to 1.21 per cent.
A monthly survey showed India's manufacturing sector growth eased slightly in February as factory output and new business orders rose at a slower pace.
The Nikkei India Manufacturing Purchasing Managers Index (PMI) fell from 52.4 in January to 52.1 in February, indicating a modest improvement in operating conditions. This is for the seventh consecutive month that the index remained above the 50-point-mark that separates expansion from contraction.
However, Moody's Investors Service today estimated that India will grow 7.6 per cent in calendar year 2018 and 7.5 per cent in 2019, amid signs of economic recovery from impact of demonetisation and GST.