The Sensex fell as much as 595.21 points before ending 382.93 points lower, or 1.85 percent, to 20,263.71. It was the biggest drop since a 651-point decline on September 3.
The index had on Thursday surged 684 points to an almost three-year high after the US Federal Reserve left its stimulus programme unchanged.
The Nifty index on the National Stock Exchange plunged 103.45 points, or 1.69 percent, to 6,012.10. Also, MCX-SX's 40-share index ended at 12026.41, down 205.69 points.
RBI Governor Raghuram Rajan, in his maiden policy review, unexpectedly hiked the repo rate or the short term lending rate by 25 basis points with immediate effect in a bid to control inflation.
The forex market also reacted negatively and the rupee depreciated 85 paise to 62.62 to the dollar intra-day.
Interest-sensitive sectors such as realty and banking were the major losers as a higher cost of credit would hamper their business and reduce revenue.
On the 30-share Sensex, 21 stocks declined, led by ICICI Bank and HDFC Bank, which together contributed more than 120 points to the index's fall.
The realty sector index dropped the most, losing 6.53 percent, followed by the banking index 4.18 percent, the capital goods index 3.04 percent and the auto index 1.58 percent.


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