The BSE Sensex fell on Wednesday as blue chips such as Tata Motors declined after the rupee slumped to a record low, escalating worries foreign investors may exacerbate outflows and dimming chances of a rate cut by the Rerserve Bank of India.
The rupee breaching the key psychological level of 60 to the dollar has worsened fears about the current account deficit and complicated the task for policy makers looking to revive an economy that grew at its slowest in a decade in 2012/13.
The falls in the rupee also led to a slump in bond prices, indicating receding bets the central bank would cut interest rates in a country still faced with the prospect of losing its investment-grade rating.
In recent months, the reform process has sputtered, taking some of the shine off India for investors, with FIIs selling shares worth 105.50 billion rupees in 11 consecutive sessions to Monday.
"Continued weakness in the rupee and FIIs selling in equities is creating a negative mood in the market, as investors are apparently selling on every rally," said Rakesh Goyal, senior vice president at Bonanza Portfolio Ltd.
The benchmark BSE Sensex fell 0.41 percent, or 77.03 points, to end at 18,552.12, ending near its lowest close in 2 months, hit on Monday.
The broader Nifty fell 0.36 percent, or 20.40 points, to end at 5,588.70, closing below the psychologically important 5,600 level.
Blue chips hit by the rupee slump include Tata Motors which fell 3.1 percent and Larsen and Toubro that ended 1.1 percent lower.
Among lenders, HDFC Bank declined 1.8 percent while ICICI Bank fell 0.7 percent.
Bharti Airtel fell 6 percent as regulatory concerns resurfaced ahead of a ministerial panel meeting on mobile spectrum auction later in the day.
Jeweller Gitanjali Gems slumped 9.99 percent, hitting its daily lower limit for a third consecutive day, on fears the government would unveil more curbs to restrict the supply of gold. The stock's three-day fall wiped out 19.54 billion rupees, or half of its market capitalisation.
Another jewellery maker, Rajesh Exports , fell 1.6 percent after its chairman told Reuters the company expects sales and earnings to grow at 10 percent in the current financial year to March, sharply slower than expected earlier, because of government measures to curtail gold imports.
Bajaj Auto fell 0.7 percent after it said it expects output at one of its plants in western India to drop by a third in June and July due to an employee strike that began on Tuesday.
Among stocks that gained, Reliance Capital rose 2.2 percent after company said it would apply for a license to enter mainstream banking in the country in partnership with Japan's Sumitomo Mitsui Trust Bank and Nippon Life Insurance of Japan.