The 30-share index was trading 373.14 points or 0.97 per cent lower at 37,963.87.
FPIs had been net investors in the equity segment in the previous five months.
Government is looking to raise up to Rs 10,000 crore through the follow-on fund offer of CPSE Exchange Traded Fund.
Forex traders said rupee along with most Asian currencies strengthened following dovish comments from New York Fed officials.
Gold prices may trade higher in coming days because of weaker dollar and speculations of US Fed rate cut, HDFC's Tapan Patel.
The benchmark BSE Sensex surrendered all gains to end at 560.041 points or 1.44 per cent lower at 38,337.01.
Brent crude futures were up USD 1.17, or 1.9 per cent, at USD 63.10 a barrel by 0505 GMT.
Rupee opened strong at 68.78 at the interbank forex market then gained further ground to touch 68.74 per dollar.
The 30-share index opened over 150 points tracking rally global equities, but surrendered all gains to trade 201.04 points lower.
The 30-share Sensex settled 318.18 points or 0.81 per cent lower at 38,897.46.