Falls also tracked lower global equities amid a slump in copper and oil prices after the World Bank cut its global growth forecast for this year, blaming sluggishness in the euro zone, Japan and some major emerging economies.
Global risk aversion amid concerns that the market is trading ahead of current earnings growth expectations is leading investors to shed some positions ahead of the Reserve Bank of India's policy review and the budget next month.
"Markets look priced in or expensive in the current global setup," said Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance.
Higher government expenditure is required in 2015 to revive the economy, he added.
As of 2.35 p.m. the benchmark BSE Sensex was down 96 points at 27,329, while the broader Nifty lost 0.31 per cent.
Slower-than-expected retail and wholesale price inflation in December is raising hopes for an early cut in interest rates to help the economy out of its longest phase of sub-par growth since the 1980s.
ITC fell over 3 per cent after the government proposed on Tuesday to amend the anti-smoking law following a panel's recommendation to ban the sale of loose cigarettes.
Sesa Sterlite slumped 7 per cent, while Hindalco Industries lost 6 per cent, after copper futures, often considered a barometer of industrial demand, slumped to 5-1/2 year lows.
Copyright: Thomson Reuters 2015