BENGALURU: Indian shares recorded their worst session in two weeks on Monday, dragged by private-sector lenders and consumer stocks, while a slew of strong earnings from state-controlled banks helped limit more losses.

The blue-chip NSE Nifty 50 index fell 1.73% to 17,213.60, while the S&P BSE Sensex dropped 1.75% to 57,621.19. Both indexes fell for a third straight session.

Economists polled by Reuters expect India's central bank on Thursday to hold its repo rate steady but increase its reverse repo rate as part of a process to reduce surplus liquidity poured into markets earlier in the pandemic.

The market is factoring in the upcoming monetary announcement and increasing crude oil prices, said Rahul Sharma, head of research, Equity99 Advisors.

"The bank Nifty is witnessing selling pressure due to high inflation expectations. If the interest rate hike comes in, then people will withdraw the liquid funds from every risky asset."

Indian shares end three-day rally

In Mumbai trading, private-sector lender HDFC Bank , heavyweight shadow lender Bajaj Finance and Tata Consumer Products were the Nifty's top drags, falling more than 3% each.

The Nifty PSU Bank index, which tracks state-owned lenders, surged as much as 4.7% to its highest since July 2019.

State Bank of India, India's largest lender, rose as much as 3.5% after reporting stronger-than-expected earnings. Smaller peer Bank of Baroda jumped nearly 10% after its quarterly profit more than doubled.

Analysts said continued foreign investment outflows due to expectations of a surge in U.S. interest rates were also weighing on the market.

Foreigner investors have sold Indian equity worth $4.94 billion this year as of Friday's close, compared with $3.62 billion worth of net buying in the same period last year, Refinitiv data showed.

India's bond and forex markets were shut due to a public holiday in the state of Maharashtra.