The Sensex provisionally fell 1.2 percent on Thursday as lenders such as SBI slumped on expectations the RBI would cut interest rates less aggressively after data showed headline inflation accelerating.
The wholesale price index (WPI) rose 7.55 percent in May from a year earlier, with core inflation estimated at 4.85 percent.
Traders said the inflation data would likely lead Reserve Bank of India to cut interest rates by 25 basis points on Monday, and possibly also the cash reserve ratio, but not the 50 basis points that some investors had hoped for.
ICICI Bank shares fell 3.9 percent, while State Bank of India lost 3.6 percent.
Other interest rate-sensitive stocks also fell, with Tata Motors falling 4.5 percent, while DLF lost 2.3 percent.
The Sensex provisionally fell 1.23 percent to 16,672.4 points, its biggest percentage decline since June 1.
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The Nifty declined 1.3 percent to 5,054.75 points.
(Reporting by Manoj Dharra; Editing by Rafael Nam)