The BSE benchmark Sensex dropped over 200 points Wednesday amid rising tension between the Reserve Bank of India and the government.
Investor sentiment turned weak in early session on reports that the government may invoke certain provisions to issue directions to the central bank.
The BSE Sensex turned choppy after opening higher, and was trading 163.74 points, or 0.48 per cent, lower at 33,727.39. It fell as much as 237.65 points on early trade.
The 30-share index had fallen 176.27 points, or 0.52 per cent, to 33,891.13 in Tuesday's session.
The NSE Nifty saw similar movement, trading 62.55 points, or 0.61 per cent, down at 10,135.85.
The bourse had as much dropped 79.95 points in morning session.
Rumours were rife that the RBI Governor Urjit Patel might offer to resign if Section 7 of RBI Act is invoked to transfer reserves.
Section 7 of the RBI Act empowers the government to consult and give instructions to the governor to act on certain issues that the government considers serious and in public interest.
Tata Steel, Coal India, Bharti Airtel, PowerGrid, NTPC, IndusInd, Adani Ports, ITC, Wipro and Vedanta are among the top losers, falling up to 4 per cent.
While, Infosys, HDFC Bank, Yes Bank, Hero MotoCorp, Sun Pharma and ONGC were the top gainers, rising up to 2 per cent.
Traders said concerns over RBI governor Urjit Patel's future, after reports suggesting the spat between the central bank and the government worsened, weighed on the market and the rupee.
The rupee dropped by 40 paise to 74.08 against the US dollar in early trade Wednesday.
Meanwhile, foreign portfolio investors (FPIs) sold shares worth a net of Rs 1,592.02 crore Tuesday, and DIIs were net buyers to the tune of Rs 1,363.04 crore, provisional data available with BSE suggested.
Globally, Asian stocks gained taking cues from a rebound on Wall Street.
Japan's Nikkei was trading 1.70 per cent up, Shanghai Composite index rose 1.13 per cent, Hong Kong's Hang Seng rose 0.60 per cent and Taiwan Weighted was up 1.80 per cent in their early sessions.
The Dow Jones Industrial Average jumped 1.77 per cent, the S&P 500 was up 1.57 per cent and the Nasdaq Composite gained 1.58 per cent in Tuesday's session.