Indian shares fell more than 1 percent on Thursday, a day after the central bank decided to hold interest rates in light of easing inflation to support the economy.
The Reserve Bank of India (RBI) kept interest rates unchanged and retained its 'calibrated tightening' stance on Wednesday as widely expected and took steps to persuade banks to lend more to help boost an economy that has lost some momentum.
Meanwhile, the government, which has been at loggerheads with the central bank, said it welcomed the Monetary Policy Committee's assessment but it believed the "policy stance probably required calibration," suggesting it may be unhappy with the RBI retaining its tightening bias.
Also, the RBI slashed its inflation projection to 2.7-3.2 percent by March-end from its prior view of 3.9-4.5 percent.
Weaker Asian shares further dampened the trading sentiment. Asian shares tumbled after Canadian authorities arrested a top executive of Chinese tech giant Huawei for extradition to the United States, feeding fears of a fresh flare-up in tensions between the two superpowers.
The broader NSE Nifty fell 1.2 percent to 10,651.50 as of 0607 GMT, with only three out of the 50 stocks trading in the green. The benchmark BSE Sensex also declined 1.07 percent to 35,501.91, with only four out of the 30 stocks trading higher.
Both the indexes posted their worst intraday fall in at least about six weeks.
"Markets will remain volatile till we come out with the verdict on the state elections," said Siddharth Sedani, head of equity advisory at brokerage firm Anand Rathi, adding that there is some nervousness from the commentary around the U.S.-China trade spat as well.
"In terms of the monetary policy outcome, it was in line with expectations, although there were some pockets who were expecting a CRR (Cash Reserve Ratio) cut which did not happen," Sedani said.
Financial stocks were the biggest drag on the Nifty, with the Nifty Bank index falling up to 1.2 percent, in its worst intraday fall since Oct. 26.
Shares of Punjab National Bank lost as much as 4.1 percent, while those of ICICI Bank Ltd fell up to 2.3 percent.
Realty stocks also took a beating, with the Nifty Realty index shedding as much as 3.6 percent in its biggest intraday fall in eight weeks.
Among the losers, shares of Aurobindo Pharma Ltd fell to their lowest since Sept. 21, on reports that the drugmaker is facing a class action lawsuit in the U.S. over carcinogenic elements in its blood pressure drug.