Downgrade of monsoon forecast raised fears of higher inflation adding to uncertainty of further rate cuts.
Meanwhile, the slow pace of recovery in the economy also weighed on market sentiment.
The 30-share Sensex ended down 661 points at 27,188 and the 50-share Nifty closed 197 points lower at 8,236."
"Although the rate cut by the central bank was in line with expectations markets witnessed a sharp fall because weak monsoon would lead to higher food prices resulting in higher inflation and further rate cuts would be delayed.
Secondly, lowering of economic growth by the central bank also led to the sell-off," said Alex Mathew, Head of Research at Geojit BNP Paribas Financial Services.
The Reserve Bank of India today reduced the benchmark repo rate, or the rate at which banks borrow from the central bank, by 25 basis points to 7.25% which was in-line with expectations.
Meanwhile, it has kept both CRR and SLR rates unchanged.
The India Meteorological Department has downgraded monsoon forecast to 88% of the long-term average as against the earlier forecast of 93%, raising fears of a drought.
Meanwhile, the RBI has cut the economic growth estimates for 2015-16 to 7.6 per cent from guidance of 7.8 per cent given in April 2015.
The central bank also highlighted uptick in global crude oil prices amid geopolitical concerns.
The Indian rupee also extended losses and was trading at 63.89 to the US dollar compared to the previous close of 63.70 tracking weakness in equities and dollar demand from importers.
SECTORS & STOCKS
All sectoral indices ended in the red with rate sensitive sectors leading the decline. BSE Realty index was the top loser down 4% while Bankex ended down 3.7% and Auto index ended 2.3% lower.
Among others FMCG and Metal indices ended down over 2% each.
Rate sensitive sectors were among the top losers after the Reserve Bank of India at its monetary policy review today signalled that it would await data on monsoon forecast and keep a check inflation before any further rate cuts.
Financials shares ended lower amid concerns of sluggish credit growth while asset quality concerns continue to weigh on the sector.
The BSE Bankex and Bank Nifty have slipped over 3.4% each.
HDFC, HDFC Bank, SBI, ICICI Bank and Axis Bank ended down 2.6-4.4% each.
FMCG majors witnessed selling pressure as weak monsoon forecast could hurt rural volumes. HUL dropped 3% while ITC has dropped over 4% after reports suggested that Maharashtra has banned sale of loose cigarettes.
Auto shares which had gained post May sales data also witnessing profit taking at higher levels. Tata Motors, Maruti Suzuki and M&M ended down 1.4-2.4% each.
Two-wheeler shares ended lower on weak May sales. Hero MotoCorp dipped 3.6% and Bajaj Auto ended down 2.8%.
Sun Pharma extended losses and ended down 2.5% amid weak March quarter results post the acquisition of Ranbaxy.
Meanwhile, Bharti Airtel was the sole Sensex gainer up 0.4%. Among other shares, Mercator jumped 8% in an otherwise weak market after the company in release today said its subsidiary Mercator Petroleum Ltd has made its first oil discovery in its very first well. In the broader market, the BSE Mid-cap index ended down 2.2% and the Small-cap index ended 2.1 lower.
Market breadth ended weak with 1,871 losers and 809 losers on the BSE.