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Indian stock markets witnessed a sharp sell-off on Friday, with benchmark indices plunging in the final hour of trade as investors grappled with uncertainty over a potential US-Iran peace deal, MSCI's latest index rebalancing and concerns over elevated crude oil prices.

A share broker reacts as Sensex and Nifty prices plummet in Kolkata. (ANI)The BSE Sensex ended 1,092.06 points, or 1.44 per cent, lower at 74,775.74, while the NSE Nifty50 slumped 359.40 points, or 1.5 per cent, to settle at 23,547.75. The sell-off intensified towards the close, with the Sensex falling nearly 1,450 points from its intraday high of 76,220.02 and the Nifty retreating from a high of 24,002.8.

Market breadth remained weak, with 2,507 stocks declining against 1,568 advances on the BSE.

A key trigger behind the decline was growing uncertainty over the prospects of a lasting peace arrangement between the United States and Iran. Investors, who had driven a strong rebound in April after a steep correction in March, opted to lock in profits amid concerns that geopolitical tensions could persist.

"We are unlikely to see a consistent rise in Indian stocks unless the uncertainty over the US-Iran conflict is clearly behind us," Arun Malhotra, founder and fund manager at CapGrow Capital, told Reuters.

The Nifty had fallen 11.3 per cent in March before rebounding 7.5 per cent in April, making markets vulnerable to profit-booking.

Losses swelled in the final half-hour of trade as MSCI's May index rejig came into effect. Passive funds tracking MSCI indices typically adjust their portfolios at the close on rebalancing day, often resulting in heightened volatility and sharp moves in heavily weighted stocks.

According to IIFL Capital, India's weight in the MSCI Emerging Markets Index, which had risen to about 20 per cent in July 2024, is expected to decline to around 11.2 per cent following the latest rebalancing exercise.

While Brent crude futures fell about 19 per cent during May, prices remain more than 27 per cent above levels seen before the Iran conflict. As the world's third-largest crude oil importer, India remains vulnerable to elevated energy prices, which can fuel inflation and widen the current account deficit.

Analysts said concerns over oil prices, combined with geopolitical uncertainty, have made investors cautious on Indian equities.

Market experts noted that foreign investors have remained selective towards Indian stocks amid concerns over valuations, elevated oil prices and the absence of a strong artificial intelligence-led technology rally that has powered several global markets.

Among major losers for the month, ONGC declined 11.4 per cent amid profit-booking following a strong rally over the previous four months and concerns over production delays at key projects. ITC fell 8.9 per cent after analysts warned that recent price hikes could impact cigarette volumes.

However, some pockets of the market remained resilient. Adani Enterprises surged 22 per cent after US authorities dropped fraud charges against Gautam Adani. Metal stocks also gained, with Hindalco and National Aluminium rising 8.6 per cent and 6.3 per cent, respectively, supported by firm domestic demand and global supply concerns linked to the Iran conflict.

Friday's decline pushed both benchmark indices into negative territory for the month. The Nifty ended May down 1.9 per cent, while the Sensex lost 2.8 per cent. Broader markets outperformed despite the weakness in large-caps, with the Nifty Midcap and Smallcap indices posting gains on optimism over corporate earnings.

Investors will now watch developments in the Middle East, crude oil prices, foreign fund flows and domestic economic indicators for cues on the market's next move.