The blue-chip NSE Nifty 50 index shed 3.76% to close at 14,529.15, while the benchmark S&P BSE Sensex ended 3.80% lower at 49,099.99. Both indexes fell as much as 4.2% earlier in the day, and posted their worst session since early May last year.
"Panic in global bond markets led to sharp rise in yields which spooked investors...the market correction might continue for some time till inflation fears ease down," said Hemang Jani, head of equity strategy, broking & distribution at Motilal Oswal Financial Services.
Indian investors are also awaiting GDP data due around 1200 GMT, with a Reuters poll showing the country's economy likely returned to growth in the December quarter after contracting 7.5% in the July-September period.
MSCI's broadest index of Asia-Pacific shares outside Japan slid more than 3%, amid fears the heavy losses suffered could trigger distressed selling in other assets.
The Nifty and Sensex had gained more than 10% in February until Thursday's close on the back of solid corporate earnings and a well-received federal budget. After Friday's rout, they are still up more than 6% for the month.
All major sectoral indices closed in the red in domestic trading, with the Nifty Bank Index falling 4.78% and the Nifty energy index losing 2.91%.
Financial stocks snapped a two-session rally, with the Nifty private bank index and the Nifty PSU bank index falling 4.67% and 3.97%, respectively.
All components of the Nifty 50 closed lower, with exploration company Oil and Natural Gas Corporation Ltd and steel maker JSW Steel Ltd the top drags for the index.