The BSE Sensex dropped over 250 points, while the broader Nifty slipped below the key 5,800 mark on Wednesday. The Sensex and Nifty have erased all the gains for the year.
The Indian rupee breached the 60 mark against the dollar again amid worries over an early end to the U.S. stimulus and India's record current account deficit.
Asian shares fell, hit by worries that the days of easy money from the U.S. Federal Reserve are numbered.
High beta metal and realty stocks were worst hit as investors booked profits after recent gains. 42 of the 50 stocks traded lower on the Nifty. Jaiprakash Associates fell over 6 per cent.
Banking stocks, which have a large weightage on the benchmark indices, also fell over 2 per cent. Banks fall after RBI issued draft guidelines that would require banks to make higher provisions and increase risk weights on exposure to companies that have unhedged foreign-currency exposure.
State Bank of India, country's largest lender and ICICI Bank saw strong selling pressure. State-run Bank of Baroda declined over 5.5 per cent.
Despite the selloff, experts remained optimistic in their outlook. Market analyst Sarvendra Srivastava said 5,780-5,800 levels should get tested amid Asian weakness, but the overall stance remains bullish.
Gaurang Shah of Geojit BNP Paribas Financial Services said there is pain as far as currency is concerned and earnings will be a shade lower than last time, but maintained that there is inherent value in certain stocks and sectors.
(With inputs from Reuters)