The likelihood of a further tapering of the US Federal Reserve’s bond-buying programme and weak cues from other parts of the world saw the Nifty and the Sensex shed over two per cent on Monday.

The Nifty closed at 6,136, down 131 points, while the Sensex lost 426 points to close at 20,707. Volatility was extremely high and the volatility index, India Vix, closed at 18.67, up 18 per cent.

The rupee fell below the 63 level for the first time in over two months as market participants remained cautious ahead of the RBI’s monetary policy on Tuesday. The central bank is widely expected to keep the key policy rates unchanged as inflation in Asia’s third largest economy remains uncomfortably high.

Weak economic data from China and the impending second announcement of tapering of the US Fed’s stimulus also weighed on the currency market sentiment.

Abhishek Goenka, Founder and CEO, India Forex Advisors, said, “The main driver behind a fierce fall in the currency was the rising expectations that the Fed would taper its ongoing QE by $10 billion on January 29, 2014. Going ahead, markets will be keenly waiting for the comments and action by the RBI Governor as he unveils the monetary policy.”

FIIs sold net equity worth ₹1,334 crore while domestic institutional investors (DIIs) were net buyers of ₹151 crore. Retail investors on the BSE also went long in the net, worth ₹25 crore.

All the broader and sectoral indices closed in the red with banking, capital goods, realty, power, metals and oil and gas being the worst performers.

The rupee closed lower at 63.10 against last Friday’s close of 62.68. This January, the rupee has fallen 1.93 per cent. The rupee fell to a low of 63.32 intra-day before foreign banks sold dollars, which helped it recover to 63.10/$ late evening.

The benchmark bond — the 8.83 per cent 10-year government security, which matures in 2023 — fell by two basis points to 8.76 per cent ahead of the RBI policy.

It fell over 20 basis points in the last four trading sessions over concerns of higher short-term interest rates, after the Urijit Patel Committee report favoured aligning the monetary policy’s focus with the consumer price index-based (CPI) inflation.

Even though the CPI or retail inflation rate declined to 9.87 per cent in December, it is much higher than the RBI’s comfort level. Patel, in his recommendations, suggested bringing it down to eight per cent in 12 months and to six per cent in 24 months.