The wider Nifty hit a low of 10,033.35 before finishing at 10,044.10, down 74.15 points or 0.73 per cent.
Equities suffered for the second straight session on Wednesday after the Reserve Bank kept interest rates on hold but raised the inflation forecast, dashing medium term rate cut hopes and sparking a sell-off in banking stocks.
Benchmark Sensex slumped 205 points to end at 32,597.18, while the broader Nifty finished at 10,044.10, down 74.15 points.
The six-member Monetary Policy Committee (MPC), headed by Reserve Bank Governor Urjit Patel, kept the policy rate unchanged at 6 per cent on expected lines but raised the inflation forecast for the remainder of the fiscal to 4.3-4.7 per cent.
The central bank kept the economic growth forecast unchanged at 6.7 per cent for the fiscal ending March 31.
The 30-share index declined by 205.26 points, or 0.63 per cent, to 32,597.18 after hitting a low of 32,565.16 soon after the central bank announced its policy decision.
The wider Nifty hit a low of 10,033.35 before finishing at 10,044.10, down 74.15 points or 0.73 per cent. It had touched a high of 10,104.20 in early trade.
Interest rate-sensitive stocks took a beating, dragging the BSE banking index down by 1.23 per cent. SBI, ICICI Bank, Axis Bank, HDFC Bank, Bank of Baroda, Punjab National Bank and Yes Bank fell by up to 2.27 per cent.
"Given that interest rates are unlikely to reduce at least in the near to medium term, rate sensitive stocks slid due to rising oil price and concern over fiscal slippage," said Vinod Nair, head of research, Geojit Financial Services.
In sync with overall trend, the rupee too weakened to quote at 64.55 against the dollar intra-day.
Sun Pharma emerged as the worst performer among Sensex constituents by falling 2.31 per cent, while Bajaj Auto declined 1.65 per cent.
Other losers, apart from bank stocks, were ONGC, L&T, Tata Motors, M&M, Tata Steel, Bharti Airtel, ITC Ltd, NTPC, Dr Reddy's, Hero MotoCorp, Asian Paint, Adani Ports, Cipla, Wipro, TCS and Lupin.
Sector-wise, the BSE metal index fell the most by 2.03 per cent, followed by telecom 1.38 per cent, PSU 1.32 per cent, banks 1.23 per cent, infrastructure 1.15 per cent, capital goods 1.09 per cent, healthcare 1.02 per cent, power 0.91 per cent and auto 0.73 per cent.
The mid-cap index shed 0.89 per cent and small-cap declined 0.66 per cent.
Meanwhile, foreign portfolio investors (FPIs) sold shares worth a net Rs 1,470.56 crore, while domestic institutional investors (DIIs) bought to the tune of Rs 1,074.39 crore on Tuesday, as per provisional data released by the stock exchanges.
Other Asian markets closed lower. Japan's Nikkei fell 1.97 per cent, Hong Kong's Hang Seng shed 1.63 per cent while China's Shanghai Index was down 0.29 per cent, extending a retreat across Europe and New York.
Frankfurt's DAX 30 fell 0.08 per cent while Paris CAC 40 shed 0.26 per cent in their early deals. London's FTSE too fell 0.16 per cent.
Photograph: Shailesh Andrade/Reuters