Equity benchmarks Sensex and Nifty plunged over 1 per cent for a second straight session on Friday dragged down by heavy selling in banking, financials, and oil stocks amid foreign fund outflows.
Massive selling in the Adani group stocks also added to the overall bearish trend.
The 30-share BSE benchmark tanked 874.16 points or 1.45 per cent, its biggest single day slide in more than a month, to settle at 59,330.90.
During the day, it plunged 1,230.36 points or 2.04 per cent to 58,974.70.
The broader NSE Nifty fell 287.60 points or 1.61 per cent to end at 17,604.35, marking its worst single-day fall since December 23, 2022.
From the Sensex pack, State Bank of India, ICICI Bank, IndusInd Bank, Axis Bank, Kotak Mahindra Bank, HDFC Bank, Reliance Industries were among the major laggards.
Bucking the trend, auto stocks Tata Motors and Mahindra & Mahindra closed with gains.
Tata Motors, which returned to profitability in the third quarter of FY23, rose the most by 6.34 per cent among Sensex shares.
Mahindra & Mahindra advanced 0.71 per cent.
ITC and UltraTech Cement were also among the winners.
"The sharp slump in the Indian market was triggered by an unfavourable research report on Asia's richest promoter group companies.
“This is also affecting the banking stocks even though the results of the sector are optimistic due to high group lending, indicating potential risk.
“PSU banks are the most impacted compared to private banks owing to high exposure.
"The FIIs' cautious stance ahead of the Union Budget and FOMC meetings also fuelled the collapse," said Vinod Nair, head of research at Geojit Financial Services.
Adani group stocks took a beating falling up to 20 per cent after the US-based investment research firm Hindenburg Research made damaging allegations.
The group's flagship Adani Enterprises, which launched the Rs 20,000 crore FPO on Friday, tanked 18.52 per cent.
Adani Ports plunged 16 per cent, Adani Power by 5 per cent, Adani Green Energy by 19.99 per cent, and Adani Total Gas by 20 per cent.
Elsewhere in Asia, equity markets in Seoul, Tokyo and Hong Kong ended in the green.
European benchmarks were trading higher during mid-session deals.
Markets in the US had ended higher on Thursday.
Stock markets were closed on Thursday on account of Republic Day.
International oil benchmark Brent crude climbed 1.35 per cent to $88.65 per barrel.
Foreign Institutional Investors (FIIs) offloaded shares worth Rs 2,393.94 crore on Wednesday, according to exchange data.
"Traders will now gear up for the next 2-big catalysts; interest-rate decision from the Federal Reserve to trickle in on February 1, and the Union Budget for 2023-24 to be presented on the same day," said Prashanth Tapse - Research Analyst, Senior VP (Research), Mehta Equities Ltd.
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