The BSE Sensex fell 1.79 per cent while the Nifty ended down more than 2 per cent on Monday, marking their second consecutive session of declines, due to continued selling in rate-sensitive shares, especially banks such as State Bank of India, after a surprise rate hike by the Reserve Bank of India (RBI) on Friday.
The Nifty has fallen nearly 4 per cent over the last two sessions, while NSE's bank index has slumped more than 8 per cent in the same period after RBI Governor Raghuram Rajan shocked markets in his maiden policy review on Friday by raising interest rates.
Expectations are that Rajan could raise policy rates again as he seems willing to risk prolonging what is already the lowest economic growth in years in order to quash persistent inflation.
Analysts say while the trend remains down for the short term, policy announcements and foreign flows should be watched next. Foreign institutional investors have so far bought around 123 billion rupees worth of Indian shares over the previous 12 sessions, exchange and regulatory data shows.
"Correction is getting amplified due to over-owned banking stocks. I think the market would now focus on pending reforms both by the RBI and the government," said Deven Choksey, Managing Director at K R Choksey Securities.
The broader Nifty fell 2.04 per cent, or 122.35 points, to end at 5,889.75, marking its lowest close in nearly a week.
The Sensex fell 1.79 per cent, or 362.75 points, to end at 19,900.96.
The NSE banking index slumped 4.5 per cent, adding to its fall of 4.1 per cent on Friday. Analysts tracking the sector say RBI's action is likely to hit the shares further as the central bank has chosen inflation over growth.
Indian federal bond yields rose to a more than three-week high on Monday, leading traders to worry about potential losses on banks' bond portfolios.
ICICI Bank fell 4.5 per cent while State Bank of India slumped 5.3 per cent.
In non-banking finance companies, Housing Development Finance Company fell 4.2 per cent while IDFC ended 5.8 per cent lower.
Stock prices of other companies that stand to lose in a high-interest rate environment also took a hit.
Among auto companies, Maruti Suzuki India slumped 4.5 per cent while Tata Motors fell 1.3 per cent.
Real estate developer DLF plunged 6.5 per cent while Unitech ended 4.6 per cent lower.
India's top consumer goods maker Hindustan Unilever fell 1.3 per cent, adding to Friday's 3.92 per cent slump on worries that its sales volume growth may decelerate for the July-September quarter, several dealers said.
Among stocks that gained, Titan Company gained 3.9 per cent as India will start buying gold again after a two-month gap after the government and banks agreed how new rules on imports should work, dealers said.
Rupee drops for second day
The rupee extended its fall for a second straight session on Monday, hurt by sharp losses in the domestic share market following a surprise rate hike by the Reserve Bank of India (RBI) on Friday, while fears of a tapering by Fed in October also weighed.
The rupee's rally following the Fed's decision to refrain from tapering its massive asset purchase programme on Wednesday was short-lived as the RBI chief Raghuram Rajan put inflation management back at the forefront and chose to raise key policy rates on Friday.
The local currency, which had dropped over 20 per cent to hit a record low of 68.85 on August 28, has recovered more than 8 per cent since Rajan joined office on September 4 and announced a slew of measures.
"The rupee is likely to again trade with a weakening bias for the rest of the week as Fed tapering fears are again haunting the market. They had to come at some point, but its come a bit early after yesterday's Bullard's comments," said Ashtosh Raina, head of foreign exchange trading at HDFC Bank.
"I think the rupee will hold in a 62-64 range this week and in a broad 62-65 range in the near term," he added.
The U.S. Federal Reserve could still scale back its massive bond buying programme at an October meeting should data point to a stronger economy, St. Louis Fed President James Bullard said on Friday.
The partially convertible rupee closed at 62.60/61 per dollar compared with 62.23/24 on Friday. The unit moved in a range of 62.34 to 62.73 during the session.
The Nifty fell over 2 per cent, marking its second consecutive session of decline, on continued selling in rate-sensitive shares especially banks such as State Bank of India after a surprise rate hike by the central bank.
Traders will continue to monitor any further steps by the central bank or the government for near-term direction.
In the offshore non-deliverable forwards, the one-month contract was at 63.39 while the three-month was at 64.52.
In the currency futures market, the most-traded near-month dollar/rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all closed at around 62.66 with a total traded volume of $2.22 billion.