The S&P BSE Sensex plunged by 541 points on Tuesday following weakness in the European markets triggered by a sell-off in commodity stocks on concerns over slowing demand in China.

The Sensex closed at 25,651 points while the 50-share Nifty fell 165 points, or 2.07%, to end at 7,812 points.

"The sudden sell-off in the market in today's trade has taken it to 7800 levels. The state of the market remains vulnerable as global factors have cropped up every now and then and spooked sentiments. However, investors should use these opportunities to buy into companies with good growth prospects like media, logistics, select pharma and IT companies and select PSU banks," K.Subramanyam, Co-Head Equity Advisory, Altamount Capital, told Business Standard.

Initially, the markets traded in the green on rising hopes of a rate cut by the Reserve Bank of India (RBI) as early as this month. But they gave up all the gains taking a cue from the sell-off in European markets.

Metals stocks saw heavy selling pressure, with Hindalco and Vedanta losing over over 6% at close. Banking, realty and auto stocks were also battered down ahead of the RBI's bi-monthly meeting on 29 September.

Axis Bank, SBI, ICICI Bank and HDFC Bank fell between 2% and 3%, while Tata Motors, Bajaj Auto and Hero Moto also posted losses ranging from 1 to 3%.

The share price of Amtek Auto plunged by more than 11% after the company missed the deadline to pay Rs 800 crore on bonds.

The volatility index India VIX soared nearly 12% to 20.34 points, indicating the possibility of high volatile sessions in the coming days.

The sell-off in metal shares was mainly due to the slump in European markets, which fell in the range of 1 to 2%.

"The fall in the market was largely after the European markets opened. The ECB pledged to sustain or like to maintain the inflation target of 2 per cent, which also weighed on sentiments. It simply means that the reaction has come into the euro government bonds and as a result of which the selloff has taken place in equity," Deven Choksey, MD, KR Choksey Investment Managers Private, told The Economic Times.

Besides, the sell-off was partly led by the strengthening dollar that touched a two-week high after the US Federal Reserve signaled a rate hike this year last week.

Meanwhile, the Asian Development Bank (ADB) lowered its growth projection for India to 7.4% for the current fiscal year from the previous estimate of 7.8%. The bank cited poor monsoon rainfall, a further slowdown in exports, and the government's failure to pass key reforms bills as the reasons for the downgrade.

Gold prices also ended lower on weak global cues, falling by Rs 150 to Rs Rs 26,510 per 10 grams. Silver prices declined by Rs 170 to Rs 35,830 per kg.

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