MUMBAI (Reuters) - The BSE Sensex slumped more than 2 percent on Monday, marking its biggest daily fall since September 3 as a rout in emerging markets hit blue chips, while lenders were hurt further by caution ahead of the Reserve Bank of India's policy review.
The Sensex has fallen 3.1 percent since hitting a record closing high on Thursday, reflecting how sentiment has changed suddenly as the U.S. Federal Reserve is poised to continue reducing its monetary stimulus and as fears rise of an economic slowdown in China.
The global factors have raised fears that foreign investors will start exiting India after buying a net $20.10 billion of shares in 2013.
Foreign institutional investors sold shares worth 1.96 billion rupees on Friday but are still net buyers of 32.77 billion rupees this year.
Investors are also cautious ahead of the RBI's policy review on Tuesday.
Although analysts still think the central bank will keep interest rates on hold, expectations of a rate hike are increasing after the central bank made fighting high consumer inflation a priority.
The NSE volatility index, considered at times as an investor fear gauge, surged 17 percent, reflecting the uncertainty.
"The market's reaction to the global contagion will be short-lived due to improvements in our current account. I think the RBI would support growth tomorrow and not just focus on inflation," said Deven Choksey, managing director at K R Choksey Securities.
The Sensex slumped 2.02 percent, or 426.11 points, to end at 20,707.45, marking its biggest daily decline since a 3.45 percent fall on September 3 when domestic shares were hit by worries about military tensions in Syria.
The broader Nifty lost 2.09 percent, or 130.90 points, to end at 6,135.85, closing below the technically important 6,200 level.
Among blue chip shares, Reliance Industries (RELI.NS) fell 2.8 percent, while Larsen and Toubro Ltd (LART.NS) lost 2.6 percent.
Banks were among the leading decliners ahead of the RBI's policy review. ICICI Bank Ltd (ICBK.NS) slumped 4.6 percent, while HDFC Bank Ltd (HDBK.NS) fell 3.6 percent.
Meanwhile, Tata Motors Ltd (TAMO.NS) plunged 6 percent after the automaker's managing director, Karl Slym, died when he fell from a hotel room in Bangkok in what police said on Monday could be a possible suicide.
Ranbaxy Laboratories Ltd (RANB.NS) lost 8 percent, adding to Friday's 19.43 percent plunge, as the drug maker continues to reel after the U.S. drug regulator banned more of its products.
Among stocks that gained, Glenmark Pharmaceuticals Ltd (GLEN.NS) rose 5 percent after the company reported better-than-expected earnings.
Opto Circuits (OPTO.NS) surged 12.5 percent after a Press Trust of India report carried by the Business Standard newspaper's website said Goldman Sachs is likely to acquire a 26 percent stake in the Indian medical equipment maker for around 3 billion rupees, citing sources.
Opto officials were not immediately reachable for comments.
(Editing by Anupama Dwivedi)
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