The banking and realty sectors, which are sensitive to interest rates, were the biggest losers. Mortgage lender HDFC, ICICI Bank and HDFC Bank dragged the Sensex lower by about 155 points.
The 30-share Sensex opened more than 200 points lower, extending a 383-point fall on Friday, when the RBI unexpectedly raised the repo rate to 7.5 per cent from 7.25 per cent, saying inflation had to be lowered to more tolerable levels.
The CNX Nifty index on the National Stock Exchange closed at 5,889.75, losing 122.35 points or 2.04 per cent. The SX40 index on the MCX Stock Exchange fell 206.17 points to 11,820.24.
IT stocks Wipro, Infosys and TCS gained as the rupee weakened. The local currency traded at 62.6 against the dollar in the afternoon compared with Friday's close of 62.23.
British lender Standard Chartered said it expects the RBI to increase the repo rate to 8 per cent by the end of 2013 as it focuses more on inflation than growth, while Japanese brokerage Nomura said it expects a 0.50 per cent hike in the rate this fiscal.