Indian stocks fell sharply on Monday as investors rushed to sell their holdings amid a global sell-off, as hopes of a speedy economic recovery seemed elusive with rising coronavirus cases further darkening the outlook.

With the reality of the floundering economy triumphing over the hope of a quick recovery to pre-crisis levels, analysts are predicting a period of high volatility in stock prices.

The benchmark indexes fell more than 2%, dragged down by banking and metal stocks.

The BSE Sensex fell 811.68 points, or 2.09%, to 38,034.14. The broader Nifty index fell a steeper 2.46% to 11,250.55.

In the US too, stocks fell sharply in early trading on Monday. The Dow Jones Industrial Average plunged 934 points, or 3.4% while the S&P 500 lost 2.6%.

Investors across the world remained nervous with reports suggesting that several European countries are preparing for more lockdowns because of a resurgence in covid-19 cases and fading hopes of a fresh stimulus in the US.

Markets in Asia-Pacific were further hurt as Hong Kong-listed shares of Standard Chartered and HSBC, both named in the FinCEN Files for alleged money laundering, plunged.

Analysts attributed the decline in India to investors booking profits after stocks rebounded sharply from their March lows.

“Markets traded lower and sold off in a major way due to several factors, like reports about suspected irregular financial dealings involving some of the major international banks, fears of pandemic rising in a second wave in many parts of Europe and some amount of profit booking with the domestic indexes at high levels," said Joseph Thomas, head of research at Emkay Wealth Management. “With the markets having run ahead of the economy, it is only probable that there will be a higher level of volatility."

On Friday, European countries from Denmark to Greece announced new restrictions to curb surging coronavirus infections in some of their largest cities, while Britain was said to be considering a new national lockdown.

Given the rising uncertainty around covid-19, the India volatility index (VIX) soared 13%, closing at 22.65 on Monday.

A rising VIX index indicates that investors expect further correction in markets ahead.

The sell-off may continue for some more time, according to Arjun Yash Mahajan, head-institutional business, Reliance Securities.

“Cases in India are not looking to fall or peak any time in the near future, and thus, the overall uncertainty relating to covid-19 is creating concern in the markets. Finally, the government is cutting short the Monsoon session of Parliament, and as per news, the session may end on Wednesday, showing how jittery the government is to face any tough and challenging questions in the Parliament," Mahajan said.

In the absence of domestic institutional money, foreign liquidity is critical to sustaining the rally in Indian markets.

In September, foreign portfolio investors inflows into Indian stocks have tapered to $563 million from hefty inflows of $6.05 billion and $1.15 billion in July and August.

Domestic institutional investors (DIIs), which include mutual funds and insurance companies, continue to be net sellers of Indian shares for three consecutive months. DIIs sold 5,667.47 crore in September after an outflow of 21,054.66 crore in the previous two months.

Meanwhile, spot gold slid the most in almost five weeks, falling below $1,900 an ounce as a strengthening dollar diminished demand for commodities.

Spot gold declined as much as 3.5% to $1,882.51 an ounce and silver plunged as much as 11% as the Bloomberg Dollar Spot Index headed for its biggest gain since June. Stocks tumbled amid concerns that economies will be hit by tighter coronavirus restrictions.

"Equities fell out and the dollar strengthened amid the broad risk-off sentiment in the market," said Janet Mirasola, managing director at Sucden Futures. “Gold was a victim of a stronger dollar."