Spooked by a lacklustre European markets and a mixed closing in Asia, the benchmark BSE Sensex plunged over 246 points to close at 25,616.84 following some late sell-off as RBI got ready to announce its much-publicised bi-monthly policy review on Tuesday.
The NSE Nifty gave in too, slipping below the 7,800-mark.
RBI Governor Raghuram Rajan is under pressure to cut the repo rate to a four-year low on Tuesday to 7 per cent and expectations for the same have skyrocketed, especially after the US Fed's status quo and a record low inflation here.
Rajan has already eased the policy rate by 75 bps this year so far.
Retail inflation dropped to 3.66 per cent in August and economy grew at a slower pace of 7 per cent in the same month.
Even IIP for July put up a dismal show and exports continue to remain in choppy waters.
The BSE Sensex opened higher, advanced to a high of 25,936.89 following the beginning of October series, but succumbed to profit-booking before ending at 25,616.84, loss of 246.66 points, or 0.95 per cent.
This is index's weakest closing level since 25,610.21 on September 11.
The 50-share NSE Nifty slumped below the psychological 7,800-mark and settled down 72.80 points, or 0.93 per cent, at 7,795.70.
The risk-off trade was evident as Europe remained in a bearish grip where shares were trading in deep red after mining major Glencore sank to a record low on depressed commodity prices the world over.
The China factor also added to the anxiety level as profits in major industrial companies saw their sharpest decline in four years last month.
"We are in a wait-and-watch scenario ahead of the RBI policy meet tomorrow. We believe that the market has already considered a rate cut of 25 bps, hence the commentary will be more important," said Vinod Nair, Head-Fundamental Research, Geojit BNP Paribas Financial Services.
The BSE metal index fell by more than 2.50 per cent even as auto shares tumbled 1.74 per cent.
Meanwhile, data showed foreign investors net sold shares worth Rs 115.10 crore on Thursday. Markets remained closed on Friday for Eid.
In the Sensex team, 23 shares out of 30 turned red.
Small-cap and mid-cap indices fell 0.24 per cent and 0.23 per cent, respectively, owing to selling pressure from retail investors.
In Asia, Japan Nikkei ended lower by 1.32 per cent while Shanghai Composite settled 0.27 per cent higher. Hong Kong and Korea stock exchanges remained shut for a public holiday.
Mirroring weakness on Wall Street on Friday, premier indices in Europe traded weak as Germany's DAX fell 1.66 per cent while France's CAC and the UK's FTSE shed 2.32 per cent and 1.66 per cent, respectively.
Pramit Brahmbhatt, Veracity Group CEO, said: "Blue chips slipped tracking the fall in global equities as concerns over slow global growth and lingering uncertainty over Fed rate hike hammered the global equity market."
Tata Motors was the top loser from the Sensex pack followed by Vedanta, Sun Pharma, Infosys and Coal India.
The market breadth turned negative as 1,590 stocks ended in the red while 1,136 finished higher and 131 ruled steady.
The total turnover rose to Rs 2,769.51 crore from Rs 2,567.09 crore last Thursday.
"If RBI provides a neutral or a dovish stance it will be positive for the market. We expect a rate cut of 25 bps with a hawkish outlook," added Nair.
But Rupee gains
Snapping its four-day losing streak, the rupee on Monday recovered by 11 paise to end at 66.05 against the dollar on selling of the American currency by banks and exporters amid fall in domestic equities.
The rupee resumed higher at 66.11 per dollar against the last close of 66.16 at the Interbank Foreign Exchange market.
It gained further on bouts of dollar selling to 66.01 before ending at 66.05, showing a gain of 11 paise.
It hovered in a range of 66.01 and 66.15 per dollar during the day.
In global markets, the US dollar was up against the basket of currencies in Asian trade amid relatively uneventful weekend with the dollar showing potential for gains if upcoming data strengthen the case for a hike in interest rates this year.
The dollar index was up by 0.13 per cent as against a basket of six currencies.
Meanwhile, the benchmark BSE Sensex ended lower by 246.66 points or 0.95 per cent on Monday. .
Also the ongoing uncertainty in the market has kept the rupee under pressure. Now the investors are waiting for the tomorrow's RBI's credit policy which will show the road ahead to the local markets.
In forward market today, premium for dollar declined further on sustained receivings from exporters.
The benchmark six-month premium payable in February eased further to 179-181 paise from the last weekend's level of 181-183 paise and for forward August 2016 also fell further to 394-396 paise from 397-399 paise.
The RBI fixed the reference rate for the dollar at 66.0805 and for the Euro at 73.8119.
The rupee moved up further against the pound sterling to close at 100.32 from the last weekend's level of 100.79 and firmed up to 73.80 against the euro from 74.42.
The rupee also recovered against the Japanese currency to 55.00 per 100 yen from 55.30.