The BSE Sensex fell for a second consecutive session on Monday as interest rate-sensitive stocks were hit a day before the RBI reviews monetary policy, while broader sentiment was hurt after a radical bailout plan for Cyprus spooked global markets.
The surprise decision by euro zone leaders to partially fund a bailout of Cyprus by taxing bank deposits, sent shockwaves through financial markets on Monday by shaking depositors' confidence in banks across Europe. The MSCI Asia-Pacific index excluding Japan fell 1.7 percent.
Sentiment was also hit after Moody's Investors Service said India's sustained food inflation was a negative for the country's sovereign ratings as it exacerbated macroeconomic imbalances.
All eyes are now on the Reserve Bank of India's policy review on Tuesday amid expectations the central bank will lower interest rates by 25 basis points. Dealers also said a separate cut in the cash reserve ratio, a key liquidity tool, was also possible.
"RBI rate cut announcement may not impact much, but stance on further rate cuts would," said Deven Choksey, managing director of K R Choksey Securities in Mumbai.
The Sensex fell 0.69 percent, or 134.36 points, to 19,293.20, marking its lowest close since March 6.
The Nifty fell 0.64 percent, or 37.35 points, to 5,835.25.
The RBI cut interest rates and the cash reserve ratio by 25 basis points each in end-January, but surprised investors with a cautious stance on monetary policy outlook.
That is giving added importance to the central bank's statement that will accompany its rate decision on Tuesday.
Interest rate-sensitive stocks fell before the review, with Tata Motors Ltd ending down 1.5 percent and Maruti Suzuki Ltd falling 3.25 percent.
Banks were also hit, with private sector lenders still reeling from money laundering allegations made by a journalist last week.
ICICI Bank Ltd fell 1.9 percent after India's no. 2 lender said it had suspended 18 employees pending an internal inquiry into the allegations.
Among other decliners, state-run oil retailers fell after lowering petrol prices by 2 rupees per litre, while keeping diesel prices steady.
Indian Oil Corp Ltd lost 2.16 percent, Bharat Petroleum Corp Ltd fell 2 percent, while Hindustan Petroleum Corp Ltd retreated 1.33 percent.
Shares of Coal India slumped 5.53 percent after government sources said the government was planning to sell a 10 percent stake in the company.
Jet Airways Ltd fell as much as 13.6 percent after local media reported a planned deal to sell a stake to Abu Dhabi's Etihad may be called off, but shares sharply pared losses to end down 2.85 percent after the carrier called the reports "incorrect".
However, among gainers, Larsen & Toubro Ltd rose 0.15 percent after The Economic Times reported its infrastructure unit was looking to raise 25 billion rupees by selling up to a 20 percent stake to investors.
A spokesman for L&T declined to comment when contacted by Reuters.
Bajaj Hindusthan Ltd gained 1.15 percent and Shree Renuka Sugars Ltd rose 1.32 percent on hopes the cabinet would remove a requirement that they sell a portion of their sugar output to the government at reduced prices.