Higher levels could not be sustained as participants offloaded their long positions in view of September series expiry.
Benchmark indices Sensex and Nifty fell for the second consecutive session on Thursday after the US Fed hiked interest rates and struck a hawkish stance amid rising crude oil prices.
Moreover, September futures and options (F&O) expiry added to market volatility, brokers said.
Investors offloaded their long bets in the F&O segment instead of carrying them forward to the next series for October, they added.
The BSE benchmark Sensex, after opening positive at 36,691.93, advanced to a high of 36,711.62 on covering-up of short positions in select stocks.
However, higher levels could not be sustained as participants offloaded their long positions in view of September series expiry.
The index slipped to a low of 36,238.23, before finally settling at 36,324.17, down 218.10 points, or 0.60 per cent.
It had slipped 109.79 points on Wednesday amid liquidity concerns.
The NSE Nifty closed below the key 11,000-mark by falling 76.25 points, or 0.69 per cent, to 10,977.55.
Intra-day, the 50-share index shuttled between 11,089.45 and 10,953.35.
Sentiment was briefly boosted after the government on Wednesday raised import duties on 19 items, including jet fuel and air conditioners, as it looks to check the widening current account deficit resulting from high crude oil prices and a weakening rupee.
Moreover, the Reserve Bank of India (RBI) on Thursday allowed banks to dip further into statutory cash reserves in a bid to ease a liquidity squeeze afflicting the nation's money markets.
RBI said banks could 'carve out' up to 15 per cent of holdings under the statutory liquidity reserves to meet their liquidity coverage ratio (LCR) requirements as compared to 13 per cent now.
The move follows concerns over tight liquidity conditions and banks' unwillingness to lend to NBFCs.
Global markets reeled after the US Fed raised interest rates for the third time this year on Wednesday.
The Fed said it still foresees another rate hike in December, three more next year, and one increase in 2020.
Meanwhile, foreign portfolio investors (FPIs) sold shares worth a net Rs 809.95 crore, while domestic institutional investors (DIIs) bought equities to the tune of Rs 1,555.44 crore on Wednesday, as per provisional data.
Photograph: Danish Siddiqui/Reuters