The Sensex dropped to a low of 18,359, thanks to a partial recovery - the index ended at 18,432 -- down 86 points.
In the process, the Sensex has declined 2.3% (439 points) in the last two trading days.
The NSE Nifty ended at 5,546 - down 28 points, a day ahead of the derivatives expiry.
Rate sensitive stocksĀ -- mainly the banking and realty were under selling pressure for the second straight day. Power and capital goods stocks too witnessed considerable weakness today.
Meanwhile, global markets were mixed as the US remained without any significant step to prevent default before the August 2 deadline.
After the said deadline, the US treasury would not be able to meet the debt obligations.
Markets in Asia took a beating, with Hang Seng and Nikkei ending in red. Shanghai Composite, however, added 0.7% at 2,723.
The RBI in its monetary policy review on Tuesday, raised the repo rate, the rate at which it lends to banks, by 50 basis points to 8%.
This has caught industry and market participant unawares as most of them were expecting a 25 bps rate hike. More importantly, the Central Bank continues to remain hawkish, raising fears of more hikes if inflation fails to cool down.
Significantly, RBI said the measures were expected to "reinforce the point that in the absence of complementary policy responses on both demand and supply sides, stronger monetary policy actions are required."
"With inflation persistently remaining way above the comfort level, the Reserve Bank of India had very little option but to go for another hike, but the 50 basis point hike in each repo and reverse repo
HDFC stake sale:Citi records $160-mn pre-tax gains
PSU stocks set to yield more amid divestment
'Changes in banking norms a must'
All about the NEFT revolution
Loans to pinch more; ICICI Bank hikes rates