The benchmark BSE Sensex fell to its lowest in nearly four months on Monday, with indexes breaking below key support levels as blue chips such as Tata Consultancy Services (TCS) were routed in heavy selling by foreign investors exiting emerging markets.
However, BSE Sensex recovered most of the lost ground by afternoon trade, being 33 points in the red while NSE Nifty was just 7 points down.
India's benchmark BSE index fell 1.2 percent and is down 6.6 percent since its record close on January 23, roughly the start of an emerging market shakeout driven by fears of an economic slowdown in China and the Federal Reserve's gradual wind down of monetary stimulus.
Foreign institutional investors (FIIs) sold a net $640 million in shares over the previous seven sessions since January 23. Analysts worry selling could accelerate after overseas funds bought a net $20 billion worth of shares last year, leaving them overweight and thus prone to take profits.
The country also faces general elections due by May, creating another incentive to sell, according to these analysts, even as India had been tipped to avoid the worst of the selloff in emerging markets because of its improved current account deficit and build-up in currency reserves.
Both the BSE and the broader NSE indexes fell below their 200-day moving averages on Tuesday, a breach of support which if sustained is typically seen as signalling more falls.
"FIIs are the drivers of our markets and outflows certainly worry me. One thing is for sure, there will be no new FII money in India till elections," said Paras Adenwala, principal portfolio manager at Capital Portfolio Advisor.
"I think differentiation with other emerging markets should happen provided India's election results are palatable. People would remain defensive till that time."
The BSE index fell as much as 1.2 percent to its lowest since Oct. 9. It was last down 0.64 percent, or 129 points, at 20,080.
The broader NSE index fell as much as 1.14 percent, also to its weakest since Oct. 9. It was last down 0.6 percent, or 37.5 points, at 5,964.30.
Still, India is seen in a better position than last year when similar Fed tapering fears roiled emerging markets, sending the rupee to a record low and denting shares.
Domestic shares went on to post a sharp recovery in the second half of last year following measures by the government and the central bank to slash