The benchmark BSE Sensex nosedived over 350 points, while benchmark 10-year bond yields rose to three-week highs on Wednesday, as investors continued to pare back expectations of any additional rate cut this year after the country forecasted lower-than-expected rainfall during the monsoon season.
The Reserve Bank of India had cut interest rates on Tuesday but made any additional easing contingent on food prices - a worry for investors given that India cut this year's monsoon forecast to 88 percent of the long-term average.
Shares were also hit by market speculation that some companies, largely mid-caps, were facing repayment defaults.
Less than two hours after the RBI issued its policy review statement,
Sentiment was further hit on Wednesday after the HSBC Services Purchasing Managers' Index survey showed the nation's dominant services industry contracted last month as firms raised prices at their fastest pace in a year.
"The monsoon situation has presented a double whammy. It's clear that the demand could collapse, especially rural demand," said Daljeet S Kohli, head of Research at IndiaNivesh Securities.
"Now there's also a worry that a weak monsoon will also hurt the fiscal balance due to relief packages for affected areas."
The IMD has forecast that the country will receive only 88 per cent of the 50-year long period average of 89 cm against its earlier forecast of 93 per cent.
The 30-share Sensex resumed higher at 27,230.68 and hovered in a range of 27,276.22 to 26,698.26 before ending at 26,837.20, showing a steep fall of 351.18 points or 1.29 per cent.
Similarly, the NSE Nifty declined by 101.35 points or 1.23 per cent at 8,135.10.
All BSE sectoral indices ended in the red. Among them, realty index plunged the most by 5.54 per cent, followed by FMCG 3.45%, power 2.22% and infrastructure 2.12%.
Major Sensex losers were Tata Power (-6.13%), ITC (-4.59%), ONGC (-3.81%), VEDL (-3.67%) and GAIL (-3.44%), while the major gainers were Coal India (+0.81%), Bharti Airtel (+0.79%), Infosys (0.71%), TCS (+0.4%) and NTPC (+0.22%).
Bond markets were also reeling from waning hopes about rate cuts. The benchmark 10-year bond yield rose 4 basis points to 7.97 per cent, after earlier rising to as high as 7.99 percent, a three-week high.
Meanwhile, foreign portfolio investors sold shares worth Rs 594.14 crore yesterday, while domestic institutional investors bought shares worth Rs 271.64 crore yesterday, as per provisional data.
A report by SMC Investments and Advisors said: "Most Asian stocks fell as Japanese shares slid on a stronger yen and investors awaited the outcome of talks between Greece and its creditors. Overnight, US equities settled modestly lower as rising bond yields took a toll on utilities, but optimism over Greece debt talks helped to limit losses.US factory orders fell by 0.4 per cent in April after soaring by an upwardly revised 2.2 per cent in March. Economists had expected orders to edge down by 0.1 per cent compared to the 2.1 per cent jump originally reported for the previous month."
Global markets
European shares held steady on Wednesday, with supermarket groups Ahold and Delhaize advancing after media reports suggesting merger talks between the two could come to a successful conclusion as early as June.
The pan-European FTSEurofirst 300 index was little changed at 1,572.00 points by 0724 GMT after falling in the previous session.
Equity markets in Asia were subdued on Wednesday as a widespread spike in debt yields dented the allure of risky assets, while the euro stood tall after surging on upbeat euro zone inflation data and hopes that Greece will reach a deal with its creditors.
Japan’s Nikkei lost 0.4 per cent, while Australian shares shed 0.8 per cent with Indonesian stocks also slipping. In a patchy session for the region, the modest gainers included South Korea’s KOSPI index as well as Chinese and Hong Kong stocks.
MSCI’s broadest index of Asia-Pacific shares outside Japan nudged up 0.3 per cent.