Shares cut some early losses on Monday and the rupee came off record lows, but investors remained worried that the spike in global oil prices would lead to higher domestic inflation.
The blue-chip NSE Nifty 50 index fell 1.95% to 15,929.20 by 0718 GMT, while the S&P BSE Sensex dropped 2.17% to 53,152.78, extending losses to a fourth session. Earlier in the session, both the indexes had fallen more than 3%.
The rupee touched its weakest level ever at 76.9675 against the dollar and was last trading at 76.8825. The benchmark 10-year bond yield rose to 6.89% from the previous close of 6.81%.
Oil prices soared more than 9%, touching their highest since 2008, after the United States and European allies explored a Russian oil import ban, while delays in the potential return of Iranian crude to global markets sped up supply fears.
India imports more than two-thirds of its oil requirements, and higher prices push up the country's trade and current account deficit while also hurting the rupee and fuelling imported inflation.
"Perception that a lot of foreign investors will have is that emerging markets like India carry an additional risk factor in terms of all these macro dynamics playing out and, as a safety measure, there is a move towards the dollar," said Mayuresh Joshi, head of equity research at William O'Neil & Co, India.
{{/usCountry}}"Perception that a lot of foreign investors will have is that emerging markets like India carry an additional risk factor in terms of all these macro dynamics playing out and, as a safety measure, there is a move towards the dollar," said Mayuresh Joshi, head of equity research at William O'Neil & Co, India.
{{/usCountry}}Meanwhile, foreign investors have sold close to $1 billion of financials in the last couple of weeks and close to $2.5 billion in the year-to-date, Macquarie said in a note.
On the Nifty, banks, financial services firms , private sector banks, auto stocks were among the top losers, dropping between 3% and 4%.
Among gainers, IT and metals stocks were up 0.18% and 1.33%, respectively. Oil and gas explorer ONGC was the top gainer on the Nifty 50, rising 8%.