The BSE Sensex fell on Monday to its lowest close in more than two months, with blue chips such as ITC Ltd declining as foreign investors remained sellers for nine consecutive sessions, sparking fears of continued outflows.
Falls also tracked global shares on worries about China's economic and financial stability and the continued fallout from expectations the U.S. Federal Reserve will roll back its monetary stimulus later this year.
Signs of foreign investors exiting the Indian market is keeping the rupee near record lows, with investors on the edge.
The NSE's volatility index, or India VIX, rose 10.4 percent to 21.01, its highest close since June 25, 2012 reflecting the rising volatility in options ahead of the expiry of June derivative contracts on Thursday, said dealers.
India VIX measures the cost of protection via options and is seen by some investors as a "fear" gauge.
"It's unfortunate to see negative aspects of the rupee going overboard alongside FII selling," said Deven Choksey, managing director at KR Choksey Securities.
The reaction seems overdone. Equities would start consolidating if the rupee reverts to 57 levels, Choksey added.
1.24 percent, or 233.35 points, to end at 18,540.89, marking its lowest close since April 15.
The Nifty declined 1.37 percent, or 77.40 points, to end at 5,590.25.
Foreign institutional investors have sold cash shares for nine straight sessions, totalling 77.60 billion rupees, as per exchange and regulatory data.
Blue chips, which are traditionally favoured by foreign investors, were among the leading decliners on Monday.
Cigarette maker ITC
Shares of jewellery makers slumped on the back of recent government measures to curb gold sales and falls in global prices of gold.
India has raised import duties for gold twice since January 1, but the RBI moves to tackle supply, such as making jewellers pay for gold upfront, have had more impact.
Mahindra & Mahindra Financial Ltd
However, Edelweiss Financial Services Ltd