According to market observers, investors were also rattled by another default in the NBFC (Non-Banking Financial Company) space.
Accordingly, at 1.05 p.m., the S&P BSE Sensex traded 283.02 points or 0.71 per cent lower at 39,800.52 points, while the Nifty was down 95.15 points or 0.79 per cent at 11,926.50 points.
Almost all sectoral indices, except consumer durables, IT and FMCG, were in the red. Especially impacted were the interest rate sensitive stocks such as banking, automobile and capital goods.
Additionally, stocks with exposure to DHFL came under selling pressure even as its NCDs fell sharply after rating agencies downgraded its credit rating to D
"Markets were disappointed over the fact that there were no immediate liquidity boosting measures that were announced. Though the RBI has constituted a working group on the same," Deepak Jasani, Head of Retail Research, HDFC Securities, said.
"Investors were also disappointed over the lower than expected rate cut and on the back of the DHFL default."
On Thursday, RBI lowered its key lending rate for commercial banks by 25 basis points (bps) to 5.75 per cent.
Besides, the RBI changed the monetary policy stance from neutral to accommodative. The significance of such a move can be gauged by the fact that the RBI has reduced its growth forecast to 7 per cent in 2019-20 from 7.2 per cent.
The decision to reduce the repo rate was taken by the RBI's Monetary Policy Committee (MPC) at its second monetary policy review of the ongoing fiscal.
( With inputs from IANS )