After a better start, the Sensex rose by over 80 points in early trade on the back of hopes of a rate cut after the government yesterday announced a fiscal consolidation plan.
But with the central bank today keeping key interest rate unchanged and raising the provision for restructured standard accounts from the existing 2 per cent to 2.75 per cent, the markets were disappointed led by banking sector.
"RBI has also hiked provisioning on restructured book by 75 bps which could impact profit before tax of banks from 0.1-9.0 per cent depending of existing stressed portfolio," said Dipen Shah, Head-PCG Research, Kotak Securities.
SBI, which fell 4.4 per cent, was the worst performer in Sensex while ICICI bank, HDFC Bank and HDFC also closed down.
Barring Maruti, auto stocks including Tata Motors, Hero MotoCorp and M&M fell in 1.6-3.5 per cent range as hopes of rate cut boosting demand in festival season were dashed.
With 22 scrips ending with losses, the 30-share Sensex closed 204.97 points, or 1.10 per cent, down at 18,430.85, levels last seen on September 20.
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On similar lines, the 50-share National Stock Exchange index Nifty fell by 67.70 points, or 1.19 per cent to end below key 5,600-level at 5,597.90. In the broader market, over 1,800 stocks including consumer durables, capital goods and PSU stocks fell, while just 997 shares rose.
"As expected RBI cut CRR by 25 bps while the decision to keep policy rates unchanged seems to have disappointed markets given recent government actions," said Sandeep Nanda, Chief Investment Officer, Bharti AXA Life Insurance.
Brokers said the sentiment further dampened as RBI lowered the economic growth projection to 5.8 per cent from 6.5 per cent earlier, in view of global and domestic factors like poor investments and subdued demand.
After banks, the realty sector was second worst performer today with DLF losing 2.21 per cent.