At 11:58 am, the Sensex traded 48.46 points - or 0.12 per cent - lower at 38,941.28 while the broader Nifty was at 11,543.90, down 27.30 points - or 0.24 per cent - from its previous close.

ICICI Bank, Larsen & Toubro and TCS were the top drags on Sensex, wiping out 100 points from the index.

Market breadth favoured losses, with 890 stocks on the BSE trading higher and 1,212 moving lower. On the NSE, 678 stocks advanced while 1,004 declined and 435 remained unchanged.

The NSE's India VIX index - which gauges the market's expectation of volatility in the near term - rose as much as 2.91 per cent.

Auto stocks fell, with the Nifty Auto sectoral index dropping as much as 1.41 per cent. Prominent laggards included Tata Motors, Ashok Leyland and Mahindra & Mahindra, shedding as much as 4.78 per cent, 2.93 per cent and 2.08 per cent respectively. The Nifty Metal index fell 1.98 per cent in intraday trade.

Analysts say high volatility cannot be ruled out in the coming sessions.

"The rally gave a lot of ammunition to mutual funds, which may be looking to rejig their portfolios... Despite the restructuring that is happening, stock-specific movement is still continuing," said AK Prabhakar, head of research at IDBI Capital.

The government said on Thursday that lenders have enough liquidity and retail credit growth is likely to pick up in the festival season starting October. "Sum and substance of what I heard was that there is no liquidity crisis," Finance Minister Nirmala Sitharaman said after a meeting with representatives of private sector banks and other financial institutions.