Indian shares fell more than 1 percent on Friday to post their biggest decline in three weeks, retreating from a record close in the prior session as rate-sensitive stocks dropped after the central bank governor's strong warning on inflation.
The market came under pressure after Reserve Bank of India's Raghuram Rajan called inflation a "destructive disease," according to a report from news agency Press Trust of India on Thursday carried in the website of The Economic Times newspaper.
The warning was seen raising the odds of a rate hike at the RBI's policy review next week after investors had already been on edge when a central bank panel earlier this week recommended making taming consumer inflation a priority.
A 19.43 percent plunge in Ranbaxy Laboratories Ltd , which wiped out 34.37 billion rupees ($554.71 million) of its market value after the U.S. drug regulator banned more products from the company, also weighed on the broader index.
The BSE index gained 0.33 percent this week, while the NSE index rose 0.81 percent.
"People are cautious and prefer to stay away to get more clarity on the monetary policy front. Low volumes are indicating the same. Institutional investors, who were supporting the rally throughout the week, were taking profits," said Suresh Parmar, head, institutional equities at KJMC Capital Markets.
The benchmark BSE index closed down 1.12 percent at 21,133.56, while the broader NSE index closed lower 1.24 percent at 6,266.75.
Both indexes posted their biggest decline since Jan. 2.
Losses also tracked lower Asian shares, which hit their 4-1/2 month low, as disappointing Chinese manufacturing data raised concerns over the economy.
Lenders in India retreated on caution ahead of the RBI policy review on Tuesday. Although analysts had at first expected the central bank to keep rates on hold, the outcome is now being seen as more uncertain.
Shares in State Bank of India closed lower 2.24 percent, while ICICI Bank ended down 1.97 percent.
All interest rate-sensitive stocks, including auto makers such as Tata Motors, fell. Tata Motors dropped 3.44 percent and Maruti Suzuki closed down 1.09 percent, while real estate firm DLF NS> fell 3.92 percent.
Shares in Ranbaxy, majority owned by Japan's Daiichi Sankyo Co, posted their biggest fall since Sept. 16, 2013 after the U.S. Food and Drug Administration banned more products from the Indian drugmaker.
Major drug companies' shares ended in red, with Cipla falling 1.23 percent and Sun Pharmaceutical Industries down 0.94 percent.
Larsen & Toubro, which gained 2.8 percent on Thursday after its earnings, lost 2.58 percent on profit-taking, while Bharat Heavy Electricals Ltd closed lower 3.65 percent.