Markets lost more than 2% on Thursday and the rupee hit an all-time low, as investors shunned riskier assets in the run-up to inflation data which could bolster fears of more rate hikes.
The Nifty dropped 2.22% to close at 15,808 and the Sensex fell 2.14% to 52,930.31. Both the indices logged their fifth straight session of losses and hit a two-month low.
The focus is on inflation data due today. A Reuters poll showed India's retail inflation likely surged to an 18-month high in April, staying well above the central bank's 2%-6% tolerance band for a fourth consecutive month.
Sentiment globally was weaker after data showed US inflation rose sharply in April, deepening fears of aggressive policy tightening by the US Federal Reserve and a global economic slowdown.
The rupee plunged to a record low for a second time this week, hitting 77.63 against the dollar. It settled at 77.5025.
Indian stock markets have in recent weeks been roiled by fears of sky-high inflation, a surprise interest rate hike, foreign fund outflows and mixed set of corporate results.
Foreign investors have sold Indian equities worth $2.27 billion so far this month, compared with net buying of $967 million in the same period last month, Refinitiv data showed.
"For Indian markets, inflation and Reserve Bank of India's unexpected rate increase has created some kind of nervousness," said Kranthi Bathini, director of equities strategy at WealthMills Securities.
Reliance Industries, HDFC, Bajaj Finance and Bajaj Finserv were among the top drags on the Nifty, falling between 2% and 3%. Adani Ports was the top percentage loser on Nifty, falling 6%.
Jaguar Land Rover parent Tata Motors closed down 4.1% down, ahead of its quarterly results.
India's economic growth rate is likely to slow if the central bank hikes interest rates, Finance Secretary TV Somanathan told CNBC-TV18 on Thursday.
