Markets ended at the day's low, on the back of selling pressure in metal, information technology (IT) and banking stocks.
After a flat opening, the markets wilted under selling pressure in late morning trades following Japan's credit rating downgrade by Moody's, citing the country's large budget deficit. The Sensex languished in the red for most part of the day, dropping, 242 points to touch a low of 16,256 towards the close. The index finally ended with a 212 points loss at 16,285. Nifty ended down 60 points at 4,888.
Asian markets also reeled under selling pressure after erasing morning gains post Moody’s downgrade of Japan. Hang Seng dropped 2%, while the Nikkei, Straits Times and Seoul Composite shed 1% each. In Europe, however, CAC 40 and DAX were up around 0.5-1% each.
Global investors will be looking towards the Federal Reserve's monetary action, where it is expected that Ben Bernanke will introduce some form stimulus to bolster the ailing economy. While another round of stimulus by Federal Reserve may bring foreign institutional flows back to India, macro-economic conditions continue remain a concern.
"Downgrade of Japan was on expected lines, But now bigger risk will come if Italy is downgraded as per many indication. Added Global rally or pull back has been on expectation of QE3 on Friday meeting, which will not support Asia anyway," feels A K Prabhakar, Senior Vice President Equity Research, Anand Rathi.
Back in India, analysts expect the markets to turn volatile tomorrow as investors roll over their positions on F&O expiry.
In other news, CLSA has cut the Sensex target by 1,000 points to 18,200. While the sharp correction in the market may suggest attractive valuations, the pace of corporate earnings downgrades has intensified in the recent results season, CLSA said.
Rate sensitive autos and metals were the biggest sectoral losers. Auto shares dropped on worries that rising interest rates have begun to slow consumer demand for new automobiles. The BSE auto index dropped 2.2% to 8,124.
Maruti Suzuki dropped 3.6%. Bajaj Auto, Tata Motors, Hero Motocorp and Mahindra & mahindra shed 1-4% each.
BSE IT index continued to feel the heat after S&P downgraded US from AAA to AA+. The index ended down 1%.
"IT index is the weakest of all in the medium term out look i would advise investors to stay away from the IT space," said Somil Mehta, Sr Technical Analyst (Equity), Sharekhan.
Infosys was the biggest dragger in the Sensex. The stock was down 1% at Rs 2,249. TCS and Wipro slipped 1-2% each.
Meanwhile, the HUL from the FMCG space amanged to hold on to marginal gains and ended up 0.7%. Hindalco, HDFC and ONGC were up marginally.
Bharti Airtel paid Rs 1,177.5 crore to the government in the April-June quarter toward licence fees and spectrum usage charges, more than any other service provider. Shares of Bharti Airtel, however, edged 1% lower to Rs 397 in trades.