The broader markets also caught in bear trap with the Nifty Midcap and Smallcap indices losing 2 percent each.
The market extended sharp selling pressure for second consecutive day and wiped out all previous week's gains with the Sensex falling more than 700 points intraday. The Nifty breached 10,800 levels after six trading sessions and turned negative for 2019.
Rampant selling was seen across sectors, with Nifty Bank, Auto, Financial Services, Metal and Realty indices falling 2-4 percent.
The broader markets were also caught in the bear trap with the Nifty Midcap and Smallcap indices lost about 2 percent each. Volatility index India VIX jumped nearly 7 percent closing at 16 levels.
BSE Sensex ended 642.22 points, or 1.73 percent down at 36481.09, while the Nifty50 closed 185.90 points or 1.69 percent below at 10817.60. About two shares declined for every share rising on the BSE.
"Given the current scenario, we expect the markets would remain volatile in the near term," Ajit Mishra Vice President - Research at Religare Broking said.
Here are five factors that weighed down the market:
Drone Attack and Geopolitical Tensions
On September 14, two Saudi Aramco plants at the heart of the kingdom's oil industry, including the world's biggest petroleum processing facility were attacked by drones
The attack on the two plants -- Abqaiq oil processing facility and Khurais oil field -- resulted in a temporary shortage of 5.7 million barrels per day which is 5 percent of the global crude supply, or 50 percent, of the kingdom's oil output.
US has blamed Iran for the attack, which was claimed by Iranian-backed Houthi rebels in Yemen, but Iran has denied US' charge.
Abqaiq is the world's largest oil-processing facility and crude stabilisation plant with a capacity of more than 7 million barrels per day. Khurais is the second largest oil field in the country that pumps around 1.5 million barrels per day. In August, Saudi Arabia produced 9.85 million barrels per day.
Rise in Oil Price and Global Markets
The drone attack hit 5 percent of world's oil production. As a result, crude oil prices rose nearly 20 percent in a day to near $72 a barrel intraday on Monday, though it erased some gains later in the day.
Brent crude futures, the international benchmark for oil prices, traded around $69 a barrel, which is still looked like elevated levels for a country like India that imports more than 85 percent of oil requirement.
Hence it will have direct impact on corporates as well including oil retailers, paint, tyre companies etc.
"The sharp surge in crude oil prices has definitely impacted sentiments as it has an adverse impact on Indian economy. Going forward, investors would keep a close watch on geo-political developments as any further escalation could take oil prices even higher and it would be detrimental for Indian markets and economy," Mishra said.
Asia markets were mixed in trade as investor sentiment remained cautious amid rising oil prices and heightened geopolitical tensions, with China's Shanghai falling over 1.7 percent and Hong Kong's Hang Seng declining 1.2 percent.
The Indian rupee also weakened sharply since the beginning of the week, falling 96 paise in two straight sessions and moving towards Rs 72 against the US dollar amid rising demand for the greenback vis-a-vis other currencies overseas and concerns over soaring crude prices following drone attacks on Saudi Arabia's oil facilities.
Forex traders said the drone attacks on Saudi Arabia's oil facilities have enthused demand for safe heaven assets like the US dollar.
The weak domestic equities and unabated foreign fund outflows also weighed on the domestic currency.
"The recent attack on Saudi Arabia's largest oil processing plant has sent oil prices shooting up. If production is not resumed soon, such a rise could hurt the global economy as consumer costs will also go up. This will definitely affect India, where the economy is already stressed," said Pushkar Mukewar, Co-Founder and Co-CEO of Drip Capital, a US & India based trade finance firm.
Mukewar further said that the rupee is likely to remain volatile.
Caution Ahead of FOMC Meet
Global markets also turned cautious ahead of the two-day meeting of Federal Open Market Committee, a committee within the Federal Reserve System, which will begin on September 17 and the interest rate decision will be announced on September 18.
Most experts feel the Fed may cut interest rate by 25 bps but the commentary would be key to watch out for.
Last weekend, Fed Chairman did provide some hawkish comments. He gave a positive outlook on the economy, saying that the US economy is in a good shape and despite the uncertainties he does not expect a US recession.
The Nifty50 fell 72 points on Monday, forming Doji kind of indecisive pattern on daily charts and today the index plunged more than 186 points to fall below crucial 10,850 levels, forming Bearish Belt Hold pattern on daily scale.
Experts feel if the index remains below 10,850 levels then there could be further downside to August lows."10,600 zone is the next downside support for the Nifty. It will be interesting to see if Nifty breaches 10,740 on the downside in the near term. Nifty is likely to face resistance near 10,970-11,000 zone," Amit Shah, Technical Research Analyst with Indiabulls Ventures told Moneycontrol.The Great Diwali Discount!
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