The benchmark Sensex fell 151 points today after the US Federal Reserve decided to taper its monthly bond-buying programme, raising concerns that funds available for investing in emerging markets would be reduced.
Banking, capital goods and oil & gas stocks declined the most while IT, teck, pharma and metal shares advanced. IT shares were in the limelight on expectations of the economy recovering in the US, their biggest market.
ICICI Bank, HDFC and HDFC Bank were the biggest drag on the index, while Infosys and TCS lifted it.
Starting next month, the US central bank will cut its purchases of bonds to USD 75 billion from USD 85 billion, according to a statement after the Federal Open Market Committee yesterday.
The committee expects that with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline.
The 30-share S&P BSE Sensex opened on a strong note and touched a one-week intra-day high as Asian stocks firmed up on the Fed decision. However, increased fears about the impact of the US tapering programme took the index to the day's low of 20,646.03, a drop of almost 214 points.
The Sensex recovered some ground and closed at 20,708.62, a fall of 151.24 points or 0.73 per cent.
"Emerging market economies (EMEs) have been caught off guard on the timing of the Fed decision, as consensus seemed set on March 2014. Chances of a capital flight to the US and a strong dollar are real, and EMEs could suffer as higher-than-expected equity and debt outflows can materialise than already priced in," Ashish Kumar, Economist at Elara Securities, said in a report.
Finance Minister P Chidambaram said India is better prepared for the tapering and it has been factored in.
Yesterday, the index gained for the first time in seven days and added 247.72 points after the Reserve Bank of India kept a key short-term lending rate unchanged.
The 50-share CNX Nifty on the National Stock Exchange dipped 50.50 points, or 0.81 per cent, to 6,166.65.
While announcing the reduction in the stimulus programme, the Fed said interest rates would be kept close to zero.
"Markets today felt the pressure of the Fed's decision," said Jignesh Chaudhary, Head of Research at Veracity Broking Services. "Although this was pretty much anticipated and factored in, markets just traded a bit cautiously today. A weak rupee, too, added to the negativity."
The decline in the Sensex was limited by firm global cues and capital inflows.
Foreign institutional investors bought shares worth a net Rs 1,198.60 crore yesterday, according to provisional data from the stock exchanges.
The Asian markets, except China and Hong Kong, gained after the Fed's decision. European stocks surged in early trade.
In New York yesterday, the Dow Jones Industrial Average and the S&P 500 logged new closing peaks, surging by 1.84 per cent and 1.68 per cent, respectively. The Nasdaq Composite Index spurted 1.15 per cent.
In the domestic market, 19 Sensex shares ended lower. The major losers were ICICI Bank (-3.02 pc), Larsen & Toubro (-2.96 pc), HDFC (-2.76 pc), ONGC (-2.63 pc), HDFC Bank (-2.16 pc), Tata Power (-2.13 pc) and State Bank of India (-1.95 pc).
However, Maruti Suzuki rose 2.97 pc, followed by Sesa Sterlite 1.79 pc, Sun Pharma 1.69 pc, Cipla 1.65 pc, Infosys 1.64 pc and Wipro 1.44 pc.
Among the S&P BSE sectoral indices, Bankex tumbled 2.43 pc, Capital Goods 1.91 pc and Oil & Gas 1.23 pc, while IT firmed up 1.74 pc, Teck 1.26 pc and Healthcare 1.09 pc.
The total market breadth turned negative as 1,319 stocks ended lower and 1,099 gained.