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Earlier, the Sensex hit a 52-week low, falling to an intra-day low of 16,990. The Nifty was down 202 points at 5,129, breaking the previous 52-week low of 5,177.
However, the market volatility was extremely high as the India VIX index jumped nearly 24 per cent. The average turnover was at a record high.
The recovery came as the economic affairs secretary stepped in to say that India's fundamentals were strong and there was no need to panic. R Gopalan said the markets are likely to settle by Monday or Tuesday. "Once markets are able to overcome the panic reaction, I am sure the investors will find merit in investing in our markets," Mr Gopalan said.
The sell-off was triggered because of fears of another recession in the US, where a spate of weak economic reports led to a crash on the Wall Street overnight. The Dow tanked 512.76 points, or 4.3 per cent to 11,383, in its steepest point decline in two and a half years. The Dow is now in the negative territory for the year.
Jim Rogers, CEO of Rogers Holdings said, "This is not a one day thing... this has been building for a while... people have been worried about markets... commodity markets have been doing better but at the moment everything is going down because everybody is afraid of everything." (Watch: Expect more sell-off in the next 2 years: Jim Rogers)
But Mr Rogers said there was worse in store. "But certainly in the next year or two, we are going to witness terrible sell-off because the world is in terrible trouble... America has quadrupled its debts in the last 3 years overall situation has gotten worse not better," he said.
Speaking to NDTV, Mark Mobius, Executive Chairman of Templeton Asset Management's (EM), said, "The main thing is the uncertain results in everybody withdrawing to what they concern as safe haven... in this case its more panic because the US treasury is no more considered safe." (Watch: Mark Mobius on the global market crash)
However, Mr Mobius said, “We feel it is very important to be in equities... in times like this we have everyone selling everything to get into some kind of cash and you have situations where people even start to hoard essentials... This kind of a turmoil situation... presents some kind of opportunities if some of these stocks go down to low and attractive levels."
Most analysts were taken by surprise at the magnitude of losses. Shardul Kulkarni of Angel Broking said the fall was not entirely expected though the pace of fall is surprising. "It is too early and too dangerous to go long on the markets," Mr Kulkarni said.
IT stocks were the worse hit. IT major Infosys was down nearly 6 per cent to hit a yearly low. (Read: Infosys leads IT sell-off as US stares at recession)
Some other stocks to hit 52-week lows were Reliance, Infosys, PSU major Bharat Heavy Electricals (BHEL), Jindal Steel (JSPL), Vedanta Group Company Sterlite and Sesa Goa, government owned Steel major SAIL, Aditya Birla Group's Hindalco, Sajjan Jindal's JSW Steel, JP Associates, GMR Infra, Crompton, Unitech and Bharat Forge. (Read: Infosys, Reliance hit 52-week low in stock crash)
Sandeep Bhardwaj of Tower Capital said, "It is just the beginning and wild moves are expected." Ultimately the western economies are realising that printing more money is not going to help... economies need to shrink before they grow, Mr Bhardwaj said. "Investors should put their money in fixed deposits to get 10-11 per cent interest", Mr Bhardwaj said. Pharma and Telecom is the place to be if one has to stay invested in stocks, he added.
Domestic analysts have been worried about the effects of rising interest rates and see the US slowdown as an opportunity for the RBI to hit the pause button. Parul Saini, Executive Director at RBS Asia Securities said, "Given what is happening in the US and Europe and given what is happening to the commodity prices. I do think that this could lead to the RBI potentially pausing in September if commodities continue to come off and crude oil and crude oil prices continue to come off."
Manufacturing activity in the US has been at a standstill, services that account for 90 percent of the American work force, is growing at the slowest rate in a year and a half. Consumer spending declined in June for the first time in almost two years. To top it up, the GDP is growing at the slowest pace since the end of the Great Recession. The unemployment rate continues to be at a high 9.2 per cent. In an indication of worsening US economy, some banks are planning to charge investors for their savings account.
European economies continue to reel under the debt crisis, with more countries joining Greece and Ireland. Italy and Spain might need help from the European Union.
The Asian markets were deep in the red led by the Hang Sang that slumped 5 per cent. Japan's Nikkei was down 3.7 per cent.
Global economists are also not in favour of another quantitative easing by the US to kick start its economy. Andrew Holland, CEO - Equities of Ambit Capital said, "I do not think the markets want a QE3, they can see the damage that is being caused by just throwing money after the problem. It is more constructive if the jobs grow. This would be great news for the US market and obviously keep the commodity prices down."
