The BSE Sensex slumped around 350 points or 1.76 per cent on Monday tracking global weakness and on fears that the Reserve Bank will hike rates one more time with its new found focus on inflation.
Rate-sensitive stocks, which have been under pressure ever since the RBI hiked repo rate on September 20, led the decline. The Sensex has now shed over 1,200 points since the RBI action.
The NSE's Bank Nifty dropped 2.85 per cent. Private lender ICICI Bank declined 4.3 per cent, while State bank of India shares closed 1.6 per cent lower.
Realty and auto shares also saw sharp selling pressure with DLF, India's biggest real estate developer ending 2.9 per cent lower.
Metal shares fell on concerns that a lower-than-expected reading of China's PMI by HSBC may weigh on the short-term prospect. Tata Steel slumped 5.5 per cent and was the top Nifty loser.
Traders braced for a widening of April-June current account deficit, data for which is due later in the day. DBS Bank estimates Q1 current account deficit at 4 per cent of GDP. India's widening CAD has pressured the rupee, which is off the record lows hit in August, but still hovering around 63 per dollar.
Rising imports of gold and crude oil have been the main drivers of CAD, which hit an all-time high of 4.8 per cent of GDP, or $88 billion, in FY 2013.
Global fears about an imminent shutdown of the U.S. government weighed on Street sentiments. Asian markets closed lower led by Japan's Nikkei, which declined 2 per cent.
European stocks traded with over 1 per cent cuts amid political troubles in Italy, where the government teetered on the edge of collapse. Italy is fourth largest economy in Europe.
The Sensex declined 347.50 points to close at 19,380. The broader Nifty closed 98 points lower at 5,735, while the rupee traded at 62.61 per dollar, as of 3.45 p.m., after earlier falling past 63.
(With inputs from Reuters)