The BSE Sensex fell about 1 percent on Friday with the Nifty closing below its 200-day moving average for the first time in nearly three weeks as banks declined after Reserve Bank of India (RBI) chief's comments on inflation being still high.
RBI Governor Raghuram Rajan also said on Thursday central banks risk sparking new crises by keeping their loose policy in place for too long.
Investors were cautious ahead of the June quarter current account deficit numbers due on Monday. India's current account deficit is expected to rise from the previous three-month period before easing due to a sharp fall in gold imports and improving exports.
Analysts said the market was precariously poised with its attention divided between weak macro data points and Infosys Ltd's results, due on October 11.
"Markets will remain lacklustre in the absence of positive triggers and I am bracing for the earnings season, but with a negative bias," said Sudip Bandyopadhyay, managing director of Destimoney Securities Pvt Ltd.
The benchmark BSE index fell 0.84 percent, or 166.58 points, to end at 19,727.27, also falling 2.6 percent for the week, marking its first weekly fall in five.
Nifty declined 0.83 percent, or 49.05 points, to end at 5,833.20, also falling 3 percent for the week, closing below its 200-day moving average for the first time since September 6.
ICICI Bank Ltd fell 2.4 percent, while HDFC Bank Ltd lost 2 percent.
Also, ratings agency Fitch said non-performing loans at Indian banks are expected to peak as late as March 2016, compared with its earlier estimate of the middle of current fiscal year that started in April.
Among state-owned banks, State Bank of India Ltd fell 2.1 percent, while Bank of Baroda Ltd ended 1.6 percent lower.
In non-banking lenders, Housing Development Finance Corp Ltd fell 1.1 percent while LIC Housing Finance Ltd ended 2.9 percent lower.
Dr.Reddy's Laboratories Ltd ended 1.8 percent lower on profit-taking after hitting an all-time high of 2,474.40 rupees on Thursday.
Among the gainers, Bharat Petroleum Corp Ltd surged 6.3 percent and Videocon Industries rose 5.4 percent after their partner Petrobras determined that a well off Brazil's northeastern coast likely holds more than a billion barrels of oil.
Sun Pharmaceutical Industries Ltd gained 1.5 percent after earlier touching an all-time high of 597.50 rupees on expectations of higher sales of its key cancer drug.