Indian shares fell nearly 2 percent on Monday, posting their biggest intraday percentage drop since June 24, in a global selloff on renewed talks that the US Federal Reserve might be serious about raising interest rates as early as next week.
Also weighing on sentiment were reports that the Bank of Japan was considering ways to steepen the Japanese yield curve, along with worries that central banks more generally were running short of fresh stimulus options.
Reflecting the caution, Asian shares suffered their sharpest setback since June with MSCI's broadest index of Asia-Pacific shares outside Japan falling 2.2 percent, pulling away from a 13-month peak hit last week.
Some Fed officials have been trying to convince markets that the September meeting would be "live" for a hike, even though futures only imply a one-in-four chance of a move.
"The main trigger for today's fall comes from the Fed comments made on Friday on the increased probability of a rate hike. Markets also remain heated from last week's reports of a nuclear test in North Korea," said Neeraj Dewan, director at Quantum Securities, adding that he expected the market volatility to continue until the Fed decision.
The NSE volatility index, a key gauge to measure investors' fear, rose as much as 13.9 percent to its highest since August 10.
Investors also await the August consumer price inflation data expected later in the day for clues about the economy. The broader NSE index was down 1.5 percent at 8,734.6 as of 0623 GMT after declining as much as 1.89 percent earlier in the day, while the benchmark BSE index was 1.4 percent lower at 28,393.9 after shedding up to 1.9 percent.
Both the indexes posted their worst intraday fall since June 24. Indian stock markets will be closed on September 13 for a public holiday.
Banking shares took the maximum hit with the Nifty bank index among the leading losers, posting its biggest intraday percentage fall since June 24. The sector had gained about 5.5 percent in the last two weeks. Among banks, State Bank of India fell 2.6 percent, Punjab National Bank declined 2.6 percent and ICICI Bank dropped 3.3 percent.