The NSE Nifty 50 index fell 0.61% to 14,850.75, while the S&P BSE Sensex slid 0.69% to 49,161.81.
Stock markets in Asia and Europe dropped as U.S. inflation expectations surged to their highest in a decade with the economy reopening from pandemic-driven shutdowns, fanning concerns that interest rate hikes could arrive earlier than expected. [MKTS/GLOB]
April consumer price data for the United States is due on Wednesday.
"Markets will keenly watch the inflation data from the U.S. as any unexpected rise could lead to potential interest rate hikes and stoke fears of institutional money moving out. This could lead to pressure on the Indian banking space in particular," said Gaurav Garg, head of research, CapitalVia Global Research.
This comes even as the Reserve Bank of India is expected to maintain status quo on rates as inflation is likely to remain within its target.
Over the last four sessions, India's Nifty and Sensex had gained about 3% and 2.5%, respectively, even as domestic coronavirus cases surged.
Shares of lenders accounted for most of the losses on the benchmark Nifty on Tuesday. The Nifty Bank index fell 0.8%, with top private-sector lender HDFC Bank declining 1.2%.
The Nifty Metal index dropped 0.9% after a commodity-driven four-day rally to record highs, while IT majors Infosys and Tata Consultancy Services slipped 0.7% each.
State-run firms Coal India, NTPC, Indian Oil Corp and GAIL were among the top gainers in the Nifty 50, rising 4.6%-5.9%.
($1 = 73.4850 Indian rupees)
(Reporting by Chris Thomas in Bengaluru; Editing by Subhranshu Sahu)