The BSE Sensex fell for a sixth consecutive session on Friday to a two-month low, as blue chips such as ICICI Bank were hit by caution ahead of the resumption of the winter parliament session, which is seen as a key test for the government's reform credentials.
The benchmark index is now at close to levels in mid-September, when the government sparked a rally by announcing a hike in diesel prices and measures to open up the multi-brand retail and aviation sectors to foreign investment.
However, markets have faltered since the start of October amid doubts about the governments resolve to implement those reforms given political opposition to some of the measures.
Most recently, the global risk environment has worsened, especially in light of potentially protracted negotiations over the U.S. fiscal cliff, sending the index down around 2 percent for the week.
"If the political alignments don't work out, then it will be a problem for the markets especially in the background of twin deficits," said G. Chokkalingam, chief investment officer at Centrum Wealth Management.
The benchmark BSE index fell 0.88 percent, or 162 points, to end at 18,309.37 points, marking its lowest close since Sept 13.
For the week, the Sensex fell 2 percent, marking its biggest weekly fall since the week ended on May 11.
The broader NSE Nifty fell 1 percent, or 56.95 points, to 5,574.05 points, marking its lowest close since September 20.
The Nifty also fell 2 percent for the week, its biggest fall since the week ended on August 31.
Investors are also concerned about India's ability to contain its fiscal deficit. Finance ministry officials conceded privately the country will struggle to shore up its finances after a dismal response to this week's auction of mobile phone licences and a battle to sell stakes in state companies.
These rate-sensitive stocks were also hit after Reserve Bank of India Governor Duvvuri Subbarao called inflation still quite high, even as data this week showed the wholesale price index unexpectedly easing last month.
Real estate stocks also fell, with DLF losing 2.7 percent, while Unitech
Recent outperformers also fell. Ashok Leyland
However, broader losses were capped by gains as software services exporters rose after under-performing recently. Infosys rose 2.05 percent on value buying, after falling 2.2 percent for the week as of Thursday's close.
Bharti Airtel surged 3.8 percent to end near its highest closing level since July 30. Shares have gained 9.3 percent over the four previous session after an auction of 2G airwaves attracted less demand than targeted by the government, leading to lower prices.
Bank of America-Merrill Lynch upgraded Bharti Airtel to 'buy' from 'neutral' citing the positive outcome of the 2G auction this week.