Further, forecast of a weak monsoon and cut in growth forecast by global ratings agency Moody's also dampened sentiment
The 30-share Sensex ended down 47 points at 27,832 and the Nifty ended 11 points lower at 8,467.
In the broader market, the BSE Mid-cap index ended up 0.5% and the Small-cap index closed 0.8% higher.
Market breadth ended with 1,629 gainers and 1,240 losers on the BSE.
"The sell-off in Chinese shares impacted sentiment. Since our currency markets were closed today, keeping the negative impact on other emerging market currencies bout of profit booking emerged in anticipation of the rupee further depreciating in tomorrow's trade."
Sentimentally, the prospects of a weaker rupee seems to augur well for the IT sector," said Prakash Diwan, Director, Altamount Capital Management. Meanwhile, rating agency Moody's Investors Service on Tuesday scaled down its projections for India's economic growth for 2015-16 to 7% from an earlier estimate of 7.5% on deficient monsoon, also dampened market sentiment.
The US Fed Reserve is set to release the meeting minutes of the two day policy held on July 28-29 tomorrow which would signal the central bank's stance on key policy rates.
Further, on the monsoon front, according to India Meteorological Department (IMD), so far, the country has received 10% below average rainfall.
Global markets
Asian shares ended lower after a sell-off in Chinese shares on fears of further devaluation of the yuan and weak demand outlook dragged the Shanghai Composite to two-year low.
The benchmark Shanghai Composite ended down 6.5% while Hang Seng eased 1.5%. Shares in Japan and Singapore also ended with marginal losses with the Nikkei and Straits Times down 0.3% each.
European shares were trading flat with negative bias tracking the sharp decline in Chinese shares. CAC-40 and FTSE-100 were down 0.2-0.4% each while DAX was trading nearly unchanged.
Sectors and stocks
BSE Metal index was the top loser down 1.9% followed by Healthcare, Bankex and Realty. However, BSE IT index was the top gainer up 1.6% followed by Consumer Durables.
Metal pack has slipped on concerns of weak demand amid slowdown in Chinese economy. Vedanta, Hindalco and Coal India ended down 2-4.2% each.
Oil prices slipped further in Asia today, weighed down by a strengthening dollar as concerns about weakening demand in China added to the woes of already oversupplied market.
RIL lost 0.6% while ONGC eased 1.2% and GAIL ended down 4.4%.
IT exporters gained on expectations that the weakening rupee would boost revenues. Infosys and TCS ended up 1.9% each. SBI extended gains after the proposed revival plan by the government which includes capital infusion of upto Rs 20,000 crore.
Bank of Baroda ended flat after sharp gains in the previous session.
Pharma shares witnessed profit taking after recent gains. Lupin, Sun Pharma, Cipla and Dr Reddy's Labs ended down 0.1-2.9% each.
Financials were also among the top losers with HDFC, HDFC Bank and ICICI Bank easing 0.5-1% each.
Among other companies, Tea and coffee companies gained 3-9% each on the bourses on reports that the government is considering allowing foreign direct investment (FDI) in coffee plantation sectors.
Among individual stocks, Tata Coffee has rallied 7%, while CCL Products, Mcleod Russel India, Andrew Yule & Company, Bombay Burmah Trading Corporation, Tata Global Beverages have surged by 4-8% each.
United Bank of India ended up 3% after the bank reduced interest rate on domestic term deposits by 25-50 basis points across various maturities.
Gujarat Pipavav ended up 8.5% after Kotak Mahindra (International) bought 6.5 million shares of Gujarat Pipavav at Rs 197 per equity share, as per bulk deal data on NSE.
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