The saying “sell in May and go away” seems to be proving right, this

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time courtesy the steep rate increase by the Reserve Bank of India (RBI).

Indian stock markets fell nearly 2.5 per cent on Tuesday after it was felt that the 50 basis point hike in benchmark rates by the central bank would hit earnings growth of India Inc. Jitters were felt most on rate-sensitive sectors like auto (down 3.74 per cent), banking (down 3.11 per cent) and realty (down 2.91 per cent).

Sensex dropped 463.33 points to 18,534.69 -- the lowest level since March 24 -- on concerns that the RBI move would hurt economic growth. It was the 30-share benchmark’s seventh fall in as many sessions, the longest since November 2008, according to Bloomberg. On BSE 2,102 stocks declined and only 711 advanced.

National Stock Exchange’s S&P CNX Nifty slid 2.4 per cent to 5,565.25 points.

Tuesday’s fall wiped off Rs 1,43,541.84 crore in market cap of the Indian market.

Foreign funds sold shares worth a net Rs 1,178.66 crore, totalling their sales in the past three sessions to Rs 2,030 crore. Domestic institutions were net buyers by Rs 606 crore.

Dhiraj Agarwal, director, institutional equities at Standard Chartered Securities, said the correction in stock prices could continue as earnings of India Inc will take a hit in coming quarters. “While the 50 basis point hike is positive for the long term, earnings of companies would be hit in the short term.”

Also, earnings downgrades by brokerages will start to trickle in, impacting investor sentiment further, he said.

Indranil Sen Gupta, emerging Asia economist at Bank of America-Merrill Lynch, said in a note that the brokerage was cutting FY12 growth forecast by 40 basis points to 7.8 per cent on rising interest rates.

Many foreign brokerages are either recommending changes in stock portfolios by going underweight on financials and consumer staples or advising clients to remain cautious on the market in general.

Parul J Saini, India str­ategist at Royal Bank of Scotland, said, “We recommend staying with a cautious stance on the market and financials. We think 5,200-5,300 on the Nifty may be a better entry point for the market, where the index would trade at a forward P/E of around 14 times — in line with its 10-year average.”

“Pain in the market may continue for some more time,” said Agarwal of Standard Chartered Securities.

Morgan Stanley’s Ridham Desai and Sheela Rathi, in a note on Tuesday, said they were reducing financials and materials stocks in their model portfolio. Morgan Stanley is overweight or bullish on energy, industrials, telecom and utilities, and underweight on consumer staples, materials, healthcare and financials.

On Sensex, Jaiprakash Associates was the biggest loser -- down 8.05 per cent at Rs 85.05. Only BHEL ended in positive territory as Tata Motors fell 5.30 per cent and Bajaj Auto shed 5.02 per cent.