By Abhishek Vishnoi
MUMBAI (Reuters) - The BSE Sensex fell 1.79 percent while the Nifty ended down more than 2 percent on Monday, marking their second consecutive session of declines, due to continued selling in rate-sensitive shares, especially banks such as State Bank of India, after a surprise rate hike by the Reserve Bank of India (RBI) on Friday.
The Nifty has fallen nearly 4 percent over the last two sessions, while NSE's bank index has slumped more than 8 percent in the same period after RBI Governor Raghuram Rajan shocked markets in his maiden policy review on Friday by raising interest rates.
Expectations are that Rajan could raise policy rates again as he seems willing to risk prolonging what is already the lowest economic growth in years in order to quash persistent inflation.
Analysts say while the trend remains down for the short term, policy announcements and foreign flows should be watched next. Foreign institutional investors have so far bought around 123 billion rupees worth of Indian shares over the previous 12 sessions, exchange and regulatory data shows.
"Correction is getting amplified due to over-owned banking stocks. I think the market would now focus on pending reforms both by the RBI and the government," said Deven Choksey, Managing Director at K R Choksey Securities.
The broader Nifty fell 2.04 percent, or 122.35 points, to end at 5,889.75, marking its lowest close in nearly a week.
The Sensex fell 1.79 percent, or 362.75 points, to end at 19,900.96.
The NSE banking index slumped 4.5 percent, adding to its fall of 4.1 percent on Friday. Analysts tracking the sector say RBI's action is likely to hit the shares further as the central bank has chosen inflation over growth.
Indian federal bond yields rose to a more than three-week high on Monday, leading traders to worry about potential losses on banks' bond portfolios.
Stock prices of other companies that stand to lose in a high-interest rate environment also took a hit.
India's top consumer goods maker Hindustan Unilever (NSI:HINDUNILVR) fell 1.3 percent, adding to Friday's 3.92 percent slump on worries that its sales volume growth may decelerate for the July-September quarter, several dealers said.
Among stocks that gained, Titan Company (NSI:TITAN.NS - News) gained 3.9 percent as India will start buying gold again after a two-month gap after the government and banks agreed how new rules on imports should work, dealers said.
(Editing by Anupama Dwivedi)