The BSE Sensex fell about 209 points to 18,149.87 on sell-off by funds on Thursday after the Reserve Bank raised key policy rates by 25 basis points and revised upwards its inflation forecast, amid a weak trend in global markets.
Interest-rate linked stocks like banking, realty and auto were among the major losers, dragging the Sensex down.
RBI hiked the short-term lending (repo) rate to 6.75 per cent and the short-term borrowing (reverse repo) rate to 5.75 per cent with immediate effect.
Although data released today showed that food inflation dipped marginally in the first week of this month to 9.42 per cent, it is still considered high, as is overall inflation.
Opening nearly 150 points down, the 30-scrip BSE benchmark index Sensex extended losses to close the session 208.82 points or 1.14 per cent lower at 18,149.87.
It had dipped to 18,104.02 as RBI raised the rates for eighth time since March 2010 to tame rising prices, and forecast that inflation would be 8 per cent by March-end --higher than the earlier prediction of 7 per cent.
Similarly, the broad-based National Stock Exchange index Nifty lost 64.50 points, or 1.17 per cent to 5,446.65 after touching the day's low of 5,435.30.
Stock brokers said that although on the expected lines, the RBI move, as well as inflation prediction, had negative impact on the market sentiment.
Besides, weakening trend on the Asian stock markets dampened investor mood, as Japan's Nikkei ended 1.44 per cent lower and Hong Kong's Hang Seng shed 1.83 per cent.
The banking sector index ended 0.79 per cent down at 12,340.53 as SBI, ICICI Bank and HDFC bank closed in the negative territory.
The realty sector index too shed 0.80 per cent to 2,087.71 as DLF Ltd, Unitech Ltd, DB Realty and Ackruti City suffered moderate losses, while another interest-sensitive auto index dipped 1.27 per cent to 8,659.47 points after Maruti Suzuki, Tata Motors, Mahindra and Mahindra and Bajaj Auto succumbed to selling pressure.
The Sensex's heaviest-weighed Reliance Industries dropped by Rs 13.15, or 1.26 per cent to Rs 1,031.45 and the second most heavy Infosys Technologies fell by Rs 54.25, or 1.79 per cent to Rs 2,981.25.
A rise in stocks of consumer durables and power Sector, however, cushioned the fall.