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India sinks 1.8% after RBI decision; Asia lower in thin trade

Indian equities led the rest of Asia lower on the final trading day of the week after the Reserve Bank of India (RBI) unexpectedly raised its policy interest rate.

India's Sensex index closed down 1.85 percent, Japan's index ended just below the flat line and Australia's S&P ASX 200 fell off the previous day's five-year high.

Markets in China, Hong Kong and South Korea are shut for public holidays.

Asia-Pacific Market Indexes Chart

India sinks

India's benchmark index fell by up to 2.5 percent on Friday, falling below 20,100 points. It came one day after hitting a two-and-a-half-year high, after the central bank increased the repurchase rate by 25 basis points to 7.5 percent. Many economists had widely expected the RBI to leave the rate unchanged.

Meanwhile, the rupee weakened 1 percent after RBI governor Raghuram Rajan also rolled-back earlier measures to support the currency,

Why did the Fed blink at the last minute?

Nikkei 0.2% lower

Japan's benchmark index fell in choppy trade after hitting a new two-month high at 14,816 points earlier in the session.

Larger losses were capped by news that Finance Minister Taro Aso and Economics Minister Akira Amari will meet Prime Minister Shinzo Abe to discuss lowering the corprate tax rate.

A weaker currency lent support to blue-chip exporter stocks. Camera maker Nikon and Nintendo rallied 6 and 4 percent, respectively as the yen weakened to 99.3 per dollar, well-off Wednesday's low of 97.7.

Tokyo Electric Power fell 2.3 percent after earmarking $10 billion in funds to dismantle damaged reactors, according to the Nikkei newspaper.

Sydney slips 0.4%

Australia's benchmark index pulled back from the previous session's five-year high thanks to declines in mining stocks.

Gold miners reversed the previous day's strong gains even though spot gold prices hovered near a one-week high. Kingsate Consolidated fell over 4 percent while Perseus Mining lost 3 percent.

Billabong was the worst-performing stock on the index, down 7.4 percent after accepting a refinancing plan from U.S. hedge funds Oaktree Capital Management and Centerbridge Partners on Thursday.

US debt in focus

A day after the Federal Reserve left its bond-buying program intact, investor attention has turned to the the looming U.S debt ceiling. If President Obama's administration and Republicans can't agree to raise the nation's borrowing cap before October, the U.S. Treasury may not have many options left to avoid exceeding the $16.7 trillion debt limit, which could send the U.S. into default.

(Read more: Next up for the market? Government shutdown!)

"The trick with the coming week is to look for news that a deal will be done; any news this is happening will see the U.S. markets supported. Risk-off to risk-on will be the trade here. The closer we get to Sunday September 30, the risk-on to risk-off trade is the one to watch," said Evan Lucas, market strategist at IG in a note.

— By's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC