The BSE Sensex posted its biggest fall since July 2012 as banking stocks such as ICICI Bank fell a day after RBI data showed loan growth was still a concern and on weakness in global shares due to worries over Fed slowing its bond-buying programme.
This was largely a reflection of the fall in risk assets which fell after minutes of the Federal Reserve's last policy meeting cast doubts over how much longer the U.S. central bank would stick to its stimulus plan.
"The selling pressure is more global, than due to local factors. Some liquidation might continue after such high inflows," said Phani Sekhar, a fund manager at Angel Broking.
The government may peg its fiscal deficit target at 4.8 percent of GDP for the next fiscal year, but it needs to explain as to how the figure is arrived at, he said.
The Union Budget to be presented on February 28 will be keenly watched as a test of the government's commitment to fiscal responsibility, whether it has a credible plan for reducing the deficit and whether populist measures can be avoided before the general elections in 2014.
The BSE Sensex fell 1.62 percent, or 317.39 points, to end at 19,325.36, posting its biggest daily fall since July 23, 2012.
The index closed at its lowest level since December 24, 2012.
The 50-share Nifty fell 1.53 percent, or 90.80 points, to end at 5,852.25.
Banking shares were among the major losers after RBI data showed loan growth continued to remain a concern. ICICI Bank fell 3.74 percent while State Bank of India ended 1.84 percent lower.
Banks' advances have grown 8.7 percent so far this fiscal year compared with 11.2 percent a year earlier, while deposit growth was 7.8 percent compared with 11.4 percent in the same period a year earlier.
Yes Bank fell 4.37 percent while Axis Bank declined 2.4 percent.
Reliance Industries fell 1.8 percent after a 3.1 percent surge on Wednesday.
Weak sentiment led to sell-off in blue-chip metal shares such as Tata Steel , which ended 4.05 percent lower, and Jindal Steel and Power which declined 4.1 percent.
Cigarette maker ITC ended 1.13 percent lower on concerns over a hike in taxation in the upcoming budget, which might impact its volume, dealers said.
ABB fell 3.5 percent after the company reported a 74 percent fall in its October-December net profit at 167.7 million rupees.
Shriram Transport Finance Co Ltd slumped 7.5 percent after U.S. private equity firm TPG Capital raised $305 million by selling about half of its stake in the company, at a discount to Wednesday's closing price.
Shares in Videocon Industries Ltd gained 5.8 percent after the consumer electronics and oil company said it was in talks to sell its 10 percent stake in an oil and gas block off the coast of Mozambique and Tanzania.