The Reserve Bank of India's new priority to check retail inflation instead of cutting rates to boost growth has spooked investors since Thursday's Monetary Policy Review.
Both the S&P BSE Sensex and the Nifty50 on the National Stock Exchange slumped into the negative territory.
On Friday, the Sensex closed at 40,445.15, lower by 334.44 points, or 0.82 per cent, from its previous close of 40,779.59.
It had opened at 40,952.13 and touched an intra-day high of 40,952.13 and a low of 40,337.53.
Similarly, the NSE Nifty50 closed in the negative at 11,921.50, lower by 96.90 points or 0.81 per cent, than its previous close.
In terms of sectors, all sectoral indices ended in the red with PSU banks being the biggest losers with fall of more than 4 per cent, followed by pharma, cement, telecom media, NBFC and auto stocks.
"Market sentiments turned negative as investors get worried over the prolonged slowdown in the economy," said Motilal Oswal Financial Services' Retail Research Head Siddhartha Khemka.
"RBI's status quo confirms that it is prioritizing rising inflation over grim economic growth. We expect inflation to remain close to or above 5 per cent by March '20, which means that a rate cut in the next MPC in February '20 is highly unlikely."
According to Vinod Nair, Head of Research Geojit Financial Services: "Clouds over economic growth outlook and premium valuation influenced investors to stay away from rate sensitive stocks."
"Rising 10yr yield due to spike in inflation and potential slip in fiscal path may result near term consolidation in the market."
( With inputs from IANS )