Bears saw an opportunity to short the market today as key benchmark indices fell sharply on concern that the spiralling oil prices will further fuel inflation and eat into economic growth.
 
Analysts feel there is more pain left as oil prices are unlikely to fall because of strong demand and limited supply. Wilfred Sit, regional chief investment officer (Asia Pacific), Mirae Asset, said there would be some "short-term risk" to Indian markets from inflation and oil prices. "In the longer term, however, India will continue to benefit from rising domestic consumption as income levels go up," Sit said.

In New Delhi, Finance Minister P Chidambaram said that the direct tax collection target for the current financial year will soon be raised sharply, indicating strong earnings for companies in the next quarters.

The Bombay Stock Exchange Sensex closed at 15,066.10 points, down 3.25 per cent,or 506.08 points. The broad-based National Stock Exchange Nifty-50 closed at 4500.95 points, down 2.74 per cent, or 126.85 points.

Brokers felt that the next couple of trading sessions will see a short-covering rally since markets are now in an oversold zone. However, the broader sentiment continues to be bearish.

"Expectations of slowing economic growth, widening deficits, depreciating currency, high inflation and rise in interest rates describe the current macro-economic environment of India," said Amar Ambani, vice-president (research), India Infoline, adding: "Given these factors, there is no surprise as to why we are witnessing huge portfolio outflows from India."

Foreign institutional investors were net sellers in today's market, selling as much as Rs 1,344 crore worth of equities, while domestic institutional investors bought equities worth Rs 1,030 crore, according to the provisional data on the Bombay Stock Exchange website
 
The Sensex opened at 15,115.97 points, down 456.21 points from its previous close. The fall was led by index heavyweights such as Jaiprakash Associates (down 8.65 per cent to Rs 181.35 a share), DLF (down 7.39 per cent to Rs 475 a share) and ONGC (down 7.02 per cent to Rs 864.9 a share). Several frontliners touched their 52-week lows in today's market fall.
 
Refiners led by state-owned Indian Oil Corporation fell on concern that higher oil prices will widen losses from selling fuel at below-market rates under government rules. Indian Oil dropped 4 per cent to Rs 362.85, Bharat Petroleum fell 7.3 per cent to Rs 278.85 and Hindustan Petroleum lost 9.2 per cent to end the day at Rs 193.25.
 
The benefits of the increase in the retail prices of petrol, diesel and cooking gas has been partially offset with the price of the basket of crude oil that Indian refiners buy surging 6 per cent to $126.96 a barrel on Friday, the latest day for which data are available, compared with $119.81 per barrel on Thursday.
 
At the time of increasing fuel prices last week, the government had said that at $125 per barrel price of the Indian crude oil basket the country's oil marketing companies would incur revenue losses of Rs 2,45,000 crore on fuel sales. With the price of the basket now rising above $125 per barrel mark, the losses for the year could be even higher.
 
The total turnover on cash in the BSE and NSE was Rs 18,344 crore while the total turnover in the derivatives segment in both exchanges was Rs 5,447 crore.