In one of its worst falls in two years, the 30-share benchmark crashed more than 800 points intraday after the Reserve Bank of India's moves to tighten capital outflows and curb gold imports spooked foreign investors and failed to prop up the currency.
The market was also worried on fears of a downgrade and likely tapering of quantitative easing (QE).
According to Arnab Das of Roubini Global Economics, the Indian market is experiencing the carnage due to the fear from the US quantitative easing tapering.
The Indian government, which is struggling to arrest the spiraling rupee, has not been moving fast enough to attract foreign inflows, feels Mark Mobius of Templeton AMC.
The key factor investors are now keeping an eye on is additional structural reforms by the government, he told CNBC-TV18. He says rating agencies are watching India closely and the threat of a ratings downgrade is still looming.
The market which moved up in the previous four sessions on short-covering, cracked early on Friday as no words of comfort came from either the government or the RBI.
The BSE Sensex crashed 769.41 points or 3.97 percent to close at 18598.18 after hitting an intraday low of 18559.65.
The Nifty fell 234.45 points or 4.08 percent to finish at 5507.85, breaking the psycological 5500 level intraday in its first biggest fall (in percentage) since Sepetember 22, 2011. As many as 19 Sensex and 40 Nifty stocks were trading below their 200 DMAs.
BSE Realty, Metal, Capital Goods, Oil & Gas, Power and FMCG indices were down 4-6 percent while IT and Auto fell 2 percent.
Largecap names that were part of this capitulation include Reliance Industries (-4.6 percent), HDFC (-5.8 percent), HDFC Bank (-5 percent), ITC (-4.3 percent) and ICICI Bank (-5 percent). BHEL was the biggest loser with 10.7 percent losses.
Oil stocks which were excited after the government said it was in favour of one-time diesel hike, fell sharply on Friday. BPCL fell 4.3 percent and ONGC crashed 6 percent.
BSE Consumer Durables Index plummeted 8.4 percent, led by Titan Industries that was the worst performer in the index, falling 12 percent.
Bank Nifty crumbled under selling pressure, losing 5.7 percent. Bank of Baroda crashed 8.6 percent, Yes Bank cracked 12.3 percent, Canara Bank 10 percent and Bank of India lost 10 percent.
Axis Bank plunged 9.4 percent after MSCI deleted from its India Index. However, Hero Motocorp gained more 2.4 percent after MSCI increased weightage of the stock from 0.56 percent to 1.11 percent in its index.
Moody's downgraded financial strength rating of Bank of Baroda, Canara Bank and Union Bank of India. The rating agency also downgraded credit assessment of 3 banks.
Indian rupee touched a record low of 62 against the dollar as fears mount that Thursday's large improvement in the US weekly unemployment claims means the Federal Reserve will trim monetary stimulus next month. It was down 22 paise to 61.65 per dollar.
Brijen Puri of JPMorgan believes the rupeecould reach 65 against the dollar much before December. In an interview to CNBC-TV18 he said so far the government has taken serious measures to contain current account deficit (CAD) only on behalf of the rupee but nothing significant has been done to check the oil, fertiliser, coal, iron prices.
Foreign institutional investors (FIIs) have net sold Rs 563.23 crore worth of equity shares today while domestic institutional investors bought Rs 732.23 crore of shares, as per provisional data available on NSE.
FIIs have sold Rs 987.2 crore worth of index futures, but bought Rs 744.82 crore of stock futures today.