The markets had a disastrous session of trade as the banking regulator's move to hike the interest rates led to a trail of selling in the rate-sensitive space.
The Sensex ended at 1,534, weaker by 463 points and the Nifty ended at 5565, down 136 points.
The midcap index ended at 6897, down 130 points and the smallcap index ended at 8435, down 179 points.
All the sectoral indices on the BSE ended in the red, with the rate-sensitive auto index skidding by nearly 4%, and the banking and realty indices shedding in the region of three percent each.
Strengthening its already hawkish stance vis-a-vis spiralling inflation numbers, the Reserve Bank announced a 50 basis points hike in repo and reverse repo rates to 7.25% and 6.25% respectively under the liquidity adjustment facility in its third quarter review of monetary policy 2010-11.
The RBI, however, kept the cash reserve ration unchanged at 6%.
Moreover, the banking regulator lowered the economic growth projection to 8 per cent for this fiscal and promised to continue with its anti-inflationary stance.
Home, auto and other loans are set to become costlier as a result of the rate hike, while savings bank deposits are likely to fetch more as interest rates on the money lying in savings bank accounts has been hiked by half a percentage point to 4%.
The Finance Minister Pranab Mukherjee said monetary policy tightening was required "to contain inflation in the context of the volatility of commodity prices, including energy prices and food prices in the international market".
And the RBI Governor D Subbarao, commenting on the growth-inflation tradeoff, said, "high and persistent inflation undermines growth by creating uncertainty for investors and driving up inflation expectations".
Additionally, weakness across the global markets only exaceberated the situation back home.
On the global front, Asian stocks had a rough day as falling commodity prices dragged mining stocks amid a slew of earnings reports; the Hong Kong, Seoul and Taiwan indices shaved off around a percent each.
And across Europe, the CAC, DAX, and FTSE were slumping in mid-day trades.
Wall Street had ended slightly lower on Monday as investors couldn't sustain a earlier rally that followed the death of Osama bin Laden, with the Dow Jones slipping by three points and Nasdaq dropping nine points.
Navneet Daga, Derivative Analysts, KR Choksey Securities says, "Intense selling is seen because 5600 level is broken. Put sellers were active at 5600 and because the markets fell further and stop losses got triggered at 5650, the traders had to either go short on futures or buy back the puts which is putting further downside pressure.
If Nifty closes below 5600 on Tuesday, the index can fall to 5500 and if it closes above 5600 than we expect range bound trade for few days to come".
The auto space bore the brunt of selling pressure. Tata Motors plunged by 5.3% at Rs 1163, Bajaj Auto corrected by 5% at Rs 1366 and M&M dropped by 4.4% at Rs 707.
In the banking space, SBI weakened by 4% at Rs 2583, ICICI Bank shed 2.7% at Rs 1067 and HDFC Bank shed 2.4% at Rs 2235. And the realty space saw the likes of DB Realty plunging by 5.3% at Rs 90, Unitech shedding 4.9% at Rs 36 and HDIL losing 3.6% at Rs 154.
On the other hand, BHEL edged up by 0.1% at Rs 2014 to emerge as the sole gainer on the BSE.
The market breadth was weak. Out of 2925 stocks traded on the BSE, there were a mere 711 advances as against 2101 declines.
