Shares dropped on Thursday, while the rupee hit a record low, after the U.S. Federal Reserve raised interest rates and indicated it would raise rate more often than markets had expected.
The NSE Nifty 50 index 0.58% at 17,615.70, while the S&P BSE Sensex .BSESN dropped 0.60% to 59,102 as of 0505 GMT. The Indian rupee hit a record low of 80.61 against the U.S. dollar.
The Fed increased rates by 75 basis points on Wednesday – the third such rise in a row – to bring down inflation from four-decade highs and Chairman Jerome Powell said the Fed "will keep at it until the job is done."
The Indian government, however, is in no hurry to push inflation – hovering near eight-year highs of 7% – back to the central bank's 4% medium-term target, for fear that aggressive rate hikes could hurt economic growth, two sources with direct knowledge of the matter said.
The Nifty bank index dropped 1.2%. The index has gained nearly 22% so far this quarter, to hit a lifetime high last week on expectations of higher credit growth, analysts have said.
The Nifty fast moving consumer goods index was the top gainer among all sectors, rising 1%, while the auto index rose 0.4%.
"The market is seeing more of a specific stock related move rather than tracking the benchmark index," said Ajit Mishra, vice president - Research, Religare Broking Ltd, adding that FMCG and auto stocks were moving on expectations of good festive season sales.
The FMCG index has gained for four straight session, rising 4% so far this week, while the auto index has gained 2.2%.
Foreign investors purchased a net $1.4 billion worth of Indian equities so far this month as of last close, compared with a net $6.44 billion worth of equities in August.
"While the rebound in foreign investor buying is acting as a cushion for markets, the upside remains capped due to weak global cues," said Mishra.
Among individual stocks, budget carrier SpiceJet Ltd SPJT.NS fell more than 5% after India's air safety watchdog said on Wednesday it was extending a restriction on flight departures until Oct. 29.