The benchmark Sensex fell for the fourth straight day on Friday and dropped 210 points on expectations interest rates would be hiked after inflation continued to rise.
Rate-sensitive bank stocks suffered the most, sending the BSE S&P Bankex down 2.25 %, the top loser among the sectoral indices. ICICI Bank, HDFC and State Bank of India were among the shares that were a drag on the Sensex.
Eleven of the 12 sectoral indices, including power, realty and capital goods, closed lower.
The 30-share S&P BSE Sensex resumed lower and continued to slide, closing at 20,715.58, a drop of 210.03 points or 1 %. In four consecutive days, it has plunged 611 points from a record closing high on December 9.
The Sensex was at its lowest level since December 4. With a slide of 281 points since last Friday, the index had its biggest loss in five weeks.
"While Fed taper fears led to declines in the middle of the week, strong CPI inflation data further dampened sentiments," said Dipen Shah, Head - Private Client Group Research at Kotak Securities. "We expect the RBI to increase rates by 25 bps on December 18."
The 50-share CNX Nifty on the National Stock Exchange dropped 68.65 points, or 1.1 %, to end at a one-week low of 6,168.40. The SX40 on the MCX Stock Exchange shed 117.37 points to 12,315.20.
Inflation as measured by the consumer price index (CPI) rose to a nine-month high of 11.24 % in November from a revised 10.17 in October, making it harder for the Reserve Bank to lower interest rates at its next monetary policy meeting on December 18.
HSBC and Bank of America-Merrill Lynch said in separate notes they expect the central bank to raise the key policy rate by 25 basis points. A change of 1 % is equal to 100 basis points.
The government yesterday also said industrial production contracted 1.8 % in October compared with an expansion of 1.96 % in September and 8.4 % a year earlier.
Most Asian stocks ended higher in choppy trade after a report showed US retail sales in November exceeded market expectations and the US House of Representatives passed a federal budget plan yesterday.
Key indices in Hong Kong, Japan, Singapore and Taiwan moved up while they fell in China and South Korea.
European stocks markets were trading marginally higher ahead of next week's US Federal Reserve meeting.
In the domestic markets, 24 Sensex stocks fell, led by ICICI Bank (-4.12 %), BHEL (-4.06 %), Hero MotoCorp (-2.98%), Tata Power (-2.52 %), GAIL India (-2.47 %), HDFC (-2.42%), Bajaj Auto (-2.24 %) and State Bank of India (-1.96 %).
The gainers on the index included Tata Motors, which rose 2.68 %, followed by Wipro 1.63 % and Tata Steel 0.72 %.
"Markets anticipate some hawkish stance from RBI in the form of increase in interest rates during its review meeting next week. A weak rupee also added to the negative trend," said Jignesh Chaudhary, Head of Research at Veracity Broking Services.
Among the S&P BSE sectoral indices, Bankex dropped 2.25 %, Power 2.22 %, Realty 2.1 %, Capital Goods 1.86 %, Oil & Gas 1.1 % and Consumer Durables 0.93 %.
The market breadth remained negative as 1,575 stocks ended with losses, 883 finished with gains and 152 ruled steady.
Total turnover dropped to Rs 1,750.30 crore from Rs1,835.49 crore on Thursday.