The Sensex tanked 720 points in late trading and the rupee slipped below 68 to a dollar, hurtling near the all-time low of 68.80 it had touched last week.
The benchmark index pulled back a bit to close 651.47 points, or 3.45%, down from Monday’s close.
READ: No military solution to conflict in Syria: India
This was the first loss after 4 days of gains, during which the Sensex rose by 918.05 points. Investors were poorer by a staggering Rs. 1.63 lakh crore.
“The recent rally (in the past few days where the markets bounced up) were just a relief rally,” said S Udasi, senior VP and head research, IDBI Capital Markets.
US President Barack Obama meets with bipartisan Congressional leaders in the Cabinet Room at the White House in Washington to discuss a military response to Syria. (Reuters Photo)
The rupee recovered to close at 67.63 — a fall of 163 paise.
Amid the Syrian scare, the prospect of a credit rating downgrade to “junk” also cast a long shadow over the market, with Standard & Poor’s stating the chances of a downward revision of sovereign rating was higher for India than Indonesia.
After JP Morgan, HSBC Global Research and Nomura, Goldman Sachs too cut India’s growth forecast for this fiscal to 4% from 6 % earlier and said it expected the rupee to touch 72 against the dollar in the next six months.
READ: Gold steadies ahead of US economic data, Syria crisis monitored
A possible western military intervention in Syria is a cause of concern for India because of its impact on global oil prices.
Forces loyal to Syria's President Bashar al-Assad carry the national flag as they ride on motorcycles in Qusair, after the Syrian army took control from rebel fighters in June. The civil war that has unfolded in Syria has killed more than 100,000 people and driven millions from their homes. (Reuters Photo)
Though Syria is not a major oil producer, there is a fear the unrest could spread to Iraq, throw Iran into conflict with the US and draw in many of the countries in the region. These countries are large oil producers.
Global oil prices have hardened in wake of the tension surrounding Syria. This will lead to higher petrol and diesel prices in India, which imports 75% of its crude oil requirements.
READ: Rupee, shares extend falls on geopolitical worries
Besides, a higher import bill will push up foreign exchange outflows, worsening the current account deficit — the gap between dollar inflows and outflows — and weaken the rupee further.
The Indian economy grew 4.4% during April-June, the lowest in four years. It had grown 5% in 2012-13.
Anti-war demonstrators protest in front of the White House against a possible US attack on Syria. (AFP Photo)
READ: Goldman Sachs cuts India’s GDP forecast, expects rupee to reach Rs. 72/dollar