The BSE Sensex fell on Wednesday after S&P cut the country's outlook to negative, reinforcing concerns about worsening fundamentals for the economy, while Wipro dropped after issuing a muted revenue outlook.
The action from Standard & Poor's initially sent the Sensex and Nifty down more than 1 per cent, though broader losses were later cut as bargain hunting helped lift shares such as Bharti Airtel.
Sentiment is bound to remain weak in the near-term, even as S&P cited already well-flagged market risks such as India's widening current account and fiscal deficits, a slowdown in reforms, and the weaker economic outlook.
"I am not surprised by the S&P action, though it is difficult to predict the timing as the opportunity of fiscal consolidation and reforms have been missed," said A. Prasanna, an economist at ICICI Securities Primary Dealership.
"If situation deteriorates so much, financial markets will reflect that and not really wait for any rating agency."
The Sensex fell 0.33 per cent lower to 17,151.29 points, while the Nifty lost 0.4 per cent at 5,202 points.
The benchmark index has dropped 7.4 per cent since hitting its 2012 peak on February 22, reflecting how the optimism with which investors kicked off the year has slowly evaporated.
Foreign investors have turned net sellers of Indian shares worth Rs 323 crore in April, as the weakening fundamentals for the country is being compounded by uncertainty about taxation.
UBS recommended investors turn defensive in India citing increased regulatory risks and "reduced confidence" on the government's ability to tackle reforms.
Wipro led decliners on Wednesday, falling 7.15 per cent after warning about muted revenue growth, pushing down shares of rival Tata Consultancy Services down by 1.94 per cent.
Shares in Indian software services exporters have been volatile in recent weeks, given the conflicting signals given by the country's top-ranked companies in their recent earnings results.
Mahindra & Mahindra Ltd (M&M) lost 1.9 per cent due to concerns it was losing market share in its vital tractor sector.
Shares in state-run lenders Power Finance Corp Ltd (PFC) dropped 4.6 per cent, while Rural Electrification Corp lost 1.1 percent due to concerns that the S&P move would raise borrowing costs for the lenders.
However, recent sharp decliners recovered as investors were attracted by valuations. Bharti Airtel gained 1.8 percent after falling 5.2 percent in the previous two sessions on a regulatory body proposal to raise the price of basic mobile phone spectrum.