Sensex fell for the seventh day in eight sessions on Thursday, with disappointing results from software services bellwether Infosys Technologies adding to investor gloom over rising prices and the prospect of tighter monetary policy.
Food inflation in the world's second-fastest growing major economy eased marginally from a one-year peak in early January, but remained high enough to keep pressure on annual headline inflation in December and reinforce expectations of an interest rate rise this month.
Infosys Technologies fell 4.8% in its biggest one-day slide in 20 months, after it missed estimates for profit and future sales growth and warned of sluggish global economic growth.
The 30-share BSE index fell 1.8%, or 351.28 points to 19,182.82, its lowest close in seven weeks and the outlook remained subdued. Twenty-four of its components declined.
"There is suddenly a lot of pessimism floating around," said Shishir Bajpai, senior vice-president of IIFL Private Wealth.
Foreign funds have sold around $500 million of Indian equities since the new year began and the BSE index has shed 6.5%, spooked by inflation concerns that are also hurting other Asian emerging economies.
"Macro headwinds like high inflation and political deadlock are bothering. Also, reforms have slowed down. Moreover, Infosys stock became a victim of high expectations," Bajpai said.
Leading lenders State Bank of India, ICICI Bank and HDFC Bank dropped between 2.9% and 3.9% on worries the central bank would take a hawkish monetary stance at its policy on Jan 25.
The Reserve Bank of India, which raised interest rates six times in 2010, is expected to increase rates by at least 25 basis points at the policy, a Reuters poll showed.
Infosys' results sparked concerns about the outlook for India's showpiece outsourcing sector and sent rivals Tata Consultancy Services and Wipro down 1% and 2.7% respectively.
"The valuations and forex woes get me worried. They are the main issues around the IT sector," Rakesh Rawal, head of private wealth management at Anand Rathi, said.
"Going ahead, they will have to be proactive about dealing with currency risk," he said.
Rawal said he does not hold IT stocks for his clients and is avoiding the sector for now.
Declining shares outnumbered advancing ones in the ratio of 1.6:1 on low volume of 280 million shares.
The 50-share NSE index closed 1.9% lower at 5,751.90.
Earlier in the day, world stocks as measured by MSCI tested fresh 28-month high and emerging market stocks climbed to a 31-month peak.