The BSE Sensex fell nearly 2 per cent on Thursday as blue-chip shares slumped for a second straight day on fears the pace of foreign investor buying is slowing down. The Nifty closed more than 2 per cent lower, marking its biggest single-day percentage fall in nearly two months.
Waning risk appetite from foreign investors is reviving concerns about India's vulnerability when the Federal Reserve begins to taper its monetary stimulus given the country's dependence on overseas flows to bridge its current account deficit.
A new reminder came on Wednesday after minutes from the Fed's October meeting signalled a tapering could start soon, which along with China's downbeat manufacturing data, hit other shares in the region.
Foreign investors have pumped a net $6 billion into cash shares since late August, helping the benchmark BSE index .BSESN hit a record high on November 3.
"Volatility would only increase from here onwards as we head towards derivatives expiry amid weak global cues. We need at least Rs 6 to 8 billion of FII buying in the cash market everyday to sustain at these levels," said Vivek Mahajan, head of research, Aditya Birla Money.
The broader Nifty closed down 2.02 per cent, or 123.85 points, at 5,999.05, marking its biggest single-day fall since September 23 and closing below the key 6,000 level.
The BSE Sensex ended lower 1.97 per cent, or 406.08 points, at 20,229.05, marking its lowest close in a week.
Foreign investors bought shares worth Rs 800 million on Wednesday, compared with nearly Rs 10 billion each on Monday and Tuesday. They sold stock futures worth Rs 6.5 billion over the previous two sessions.
Among index stocks with high foreign ownership, ITC Ltd fell 2.4 per cent and Housing Development Finance Corporation Ltd dropped 3.2 per cent.
Among other blue-chip companies, Reliance Industries Ltd fell 1.7 per cent, Larsen & Toubro Ltd lost 2.9 per cent and ICICI Bank Ltd ended down 1.8 per cent.
Infosys Ltd fell 1.7 per cent, adding to its 1.2 per cent loss on Wednesday after hitting the highest level in nearly three years on Tuesday.
However, among stocks that gained, Dabur India Ltd rose 2 per cent as dealers cited attractive valuations after recent underperformance.