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From the Sensex pack, Infosys, TCS and IndusInd Bank were top losers, falling over 1.5%. Tata Steel, SBI, HDFC Bank, M&M and Maruti also opened with losses. On the flip side, only Titan and HUL opened with gains.

"The market is now awaiting the outcome of the Fed meeting to see how they will respond to the ongoing crisis, particularly in terms of rate hikes. Investors expect the central bank to raise interest rates by 0–25 basis points," said Vinod Nair, Head of Research at Geojit Financial Services.

Adani Group said that its engagement with financial institutions over a petrochemical project at Mundra in Gujarat was still ongoing. The group said it is trying to secure financial closure for its project and the operations at the site will start after the closure.

Gold has advanced over 8% since the news of trouble at US-based Silicon Valley Bank and extended gains on Monday even after news of Switzerland-based UBS acquiring stressed rival Credit Suisse Group AG, which was expected to soothe investor concerns.

After an announcement of the agreement, major central banks, including the U.S. Federal Reserve and European Central Bank, indicated that they would enhance market liquidity and support other banks.

Crude oil has been on a declining trajectory since last June when it reached $124 per barrel. For the last four months, prices have stayed below $90. But a rising concern about the health of the global economy in the wake of the collapse of a few banks in the US and Europe in recent weeks has triggered a sharp fall in oil prices.

Investment grade credit spreads, which indicate the premium investors demand to hold highly rated corporate bonds over safer U.S. Treasuries - rose to 164 basis points last week, the highest since October, according to the ICE BofA US Corporate Index

According to the CME FedWatch tool, markets are pricing in a 26.2% chance that the Fed will stand pat when it announces its monetary policy decision on Wednesday, with a 73.8% chance of a 25 basis point rate hike.

In foreign exchange markets the U.S. dollar steadied after slipping overnight. It last bought 131.90 yen and held at $1.0718 per euro. Bond markets whipsawed overnight as traders seek to figure out what the bank stress means for rates policy.

Markets are pricing in a 53% chance that the U.S. policymakers will hold their benchmark lending rate in the current 4.50%-4.75% range at the end of their closely-watched March 21-22 policy meeting.