MUMBAI - Indian shares slid more than 3 percent and the rupee weakened as a global market rout whacked sentiment, adding to existing investor concerns ahead of a central bank meeting this week and a new capital gains tax later in the year.
The broader NSE Nifty and the benchmark BSE Sensex each fell as much as 3.7 percent on Tuesday, heading for a sixth consecutive session of falls, with both erasing their gains for the year.
Meanwhile, the rupee retreated to 64.35/64.36 at 0455 GMT from its 64.07 close. But bonds gained as investors sought safe havens. The benchmark 10-year bond yield down 6 basis points at 7.54 percent, after last week posting its biggest weekly decrease since February 2017.
The slump in Wall Street overnight comes as India's record-setting share rally came under threat following the government's announcement of a 10 percent long-term capital gains tax in equities, which starts in April.
That has raised concerns about a drop in foreign investment into India.
So far this year, overseas funds have bought a net $2.4 billion in domestic shares, having also been net buyers in each of the six previous years.
Meanwhile, fears are rising the Reserve Bank of India could become more hawkish as inflation accelerates and the government raises investments in rural sectors and healthcare.
The RBI is set to conclude its two-day policy meeting on Wednesday and is expected to leave rates on hold but could issue stronger warnings about inflation.
"Markets had gone up too fast and a correction was more than overdue. All negatives including Fed hikes and inflation worries in India have come together. I expect 7 to 10 days for the markets to settle down," said Arun Kejriwal, founder of Kejriwal Research & Investment Services.
The NSE is now down nearly 2 percent for the year after the falls on Tuesday, after last hitting a record high of 11,171.55 on Jan. 29.
All members of the 50-share Nifty fell, with Tata Motors Ltd slumping as much as 9.9 percent to the lowest since March 2016 after the auto maker posted a much weaker than expected net profit.