The submarine was fully loaded when the explosion led to a massive fire on board INS Sindhurakshak at the Naval dockyard in Mumbai.
The submarine sank soon after the explosion.
At least 18 people were on board inside the Russian-built vessel.
Providing no information on the fate of the trapped soldiers, the Navy chief said, "We hope for the best but are prepared for the worst."
Safety mechanisms to prevent disasters did not work, the naval chief admitted at a press conference in Mumbai, while adding that an inquiry on the disaster is to be completed within four weeks.
"Quite obviously the safety mechanisms have not functioned," the Navy Chief said.
The Navy chief said that the cause of the catastrophe was not yet known.
However, he has ruled out the possibility of sabotage.
Meanwhile, naval divers managed to cut through thick layers of metal to enter the INS Sindhurakshak at 4 pm.
The 16-year-old submarine was reportedly carrying heavyweight torpedoes and "Klub" anti-shipping and land attack missiles.
The incident reportedly occurred when INS Sindhurakshak was 15 to 20 metres away from the jetty in the sea.
Defence Minister AK Antony on Wednesday described the incident as the "greatest tragedy in recent time."
Earlier the Indian Navy in a statement said,"An explosion resulting in a major fire took place on board INS Sindhurakshak, a Kilo class submarine of the Indian Navy, shortly after midnight on 14 August 2013."
"Fire tenders from the Naval Dockyard as well as the Mumbai Fire Brigade were immediately pressed into action."
"However, due to as yet unknown damage suffered as a result of the explosion, the submarine has submerged at her berth with only a portion visible above the surface," the statement said.
The Indian Navy said: "About 18 persons were on board the submarine at the time of the accident and efforts are on to ascertain the safety of the personnel and salvage of the submarine."
"A Board of Inquiry is being instituted to investigate into the causes of the accident," it said.
In February 2010, a fire broke out aboard INS Sindhurakshak while she was in Visakhapatnam. One sailor was killed and two others were injured.
Navy officials reported that the fire had been caused by an explosion in the submarine's battery compartment.
INS Sindhurakshak was built in 1997 at Saint Petersburg, for anti-submarine and anti-ship warfare, defending naval bases, securing coasts and sea lanes of communication, reconnaissance and maritime patrol operations.
The vessel had been sent to Russia after the Visakhapatnam accident for a mid-life upgradation in 2010.
She was handed over to India earlier this year after nearly two years of overhaul and refitting in Russia at the cost of 80 million dollars (Rs. 480 crore). The submarine was expected to serve the navy for at least 10 more years.
--IBNS (Posted on 14-08-2013)