The BSE Sensex crashed over 700 points or nearly 3.8 per cent on Tuesday on reports of a missile attack on Syria. The rupee plunged over 3 per cent to 68.25 per dollar, while the broader Nifty slumped over 220 points.
Both the markets and the currency, already trading down, plunged sharply minutes after reports said that the Russian defence ministry had detected two ballistic "objects" fired towards the eastern Mediterranean. The Russian embassy in Syria later said there were no signs of a missile attack or explosions in Damascus, but by then the damage in India had been done.
At times of uncertainty, investors often move out of perceived risky assets such as stocks and into supposedly safe havens such as gold.
Robert Parker of Credit Suisse told NDTV that the initial response in such situations is to push equities down. "Investors are confused by this and they are taking cautious approach," he added.
Arvind Narayanan of DBS said markets are so nervous that any negative news affects the rupee and equities. If the geopolitical concerns continue, there could be more downsides for markets and currency.
Banking stocks were the worst affected, with the Bank Nifty crashing over 5.5 per cent. On the 50-share Nifty, only four stocks managed to stay in the green.
Markets were nervous even before reports of conflict in Middle East came amid growing fears of an imminent sovereign downgrade by ratings agency Standard & Poor's.
Standard & Poor's considers chances of a credit ratings downgrade for India higher than for Indonesia, a news channel reported, adding there was more than a one-in-three chance for India rating cut within two years.
S&P has a "BBB-minus" rating on India with a "negative" outlook. A downgrade would push Asia's third largest economy to "junk" status.
The Sensex closed 651 points lower at 18,234.66, while the Nifty ended at 5,341, down 209 points. The rupee ended at 67.63 per dollar.