The 50-share Nifty plummeted by 103.45 points, or 1.69 per cent, to close at 6,012.10 on the National Stock Exchange (NSE). The barometer hit a high of 6,130.95 and a low of 5,932.85 in the early trade.
Banking stocks and the other rate-sensitive ones were the worst hit followed by capital goods, oil&gas, metal and technology as investors and traders reacted with dismay and resorted to heavy sell-off.
Contrary to the market's expectations, the Reserve Bank of India today raised the short-term policy repo rate to 7.5 per cent from 7.25 per cent, citing high inflation.
Howeverm, it rolled back some of the measures it had implemented to support the battered rupee recently.
The CRR was kept unchanged at 4 per cent.
Retail inflation was at 9.52 per cent last month, while wholesale price inflation rose to a six-month high of 6.1 per cent in August, driven by costlier food items.
Trading began on a cautious note, a day after the stunning rally. The Nifty had rallied 216 points yesterday buoyed by the US Federal Reserve's decision to keep its stimulus intact.
After trading almost flat, market reacted sharply to the apex bank's decision to hike key interest rate as overall sentiment has been supported over recent week amid hopes of a rate cut to give a push to faltering growth.
The key index plummeted below the psychological 6,000 mark briefly before recouping some lost ground after the RBI Governor Raghuram Rajan comments at the customary press briefing.
DLF, PNB, Bank of Baroda, Indusind Bank, Ranbaxy, JP Associates, L&T, ICICI Bank, Sesa Goa and Hindalco were among the biggest frontline index losers.
Prominent gainers included Reliance Infra, Ultratech Cement, GAIL, HCL Tech, Ambuja Cement, Lupin, Asian Paints, BHEL, BPCL and Grasim.
Turnover in the cash segment rose to Rs 18,303.13 crore from 18,129.68 crore yesterday. A total of 9,345.52 lakh shares changed hands in 78,90,038 trades. The market capitalisation stood at Rs 63,86,128 crore.