While patrolling north of the Faroe Islands on 23 November 1939, she was detected at 16:07 by the German battlecruiser Scharnhorst who was assigned together with her sister ship Gneisenau to attack the Northern Patrol. The German ship closed in on Rawalpindi and half an hour later signalled several times 'Stop! What ship?'. Rawalpindi answered with the signal 'F-A-M', altered course and started to lay smoke.
Despite being hopelessly outgunned, 60-year-old Captain Edward Kennedy RN of Rawalpindi decided to fight. He was heard to say "We'll fight them both, they'll sink us, and that will be that. Good-bye".
At 17:03 Scharnhorst opened fire at a distance of 7.5 kilometers. and Rawalpindi immediately returned fire. Three minutes later Rawalpindi was hit and started to burn fiercely. Rawalpindi managed to score one hit on the aft deck of Scharnhorst, which caused minor splinter damage. At 17:11 Gneisenau joined the fight and opened fire, but five minutes later the German commander ordered to cease fire as Rawalpindi signaled 'Please send boats'. Both German ships started to pick up survivors but at 19:15 German lookouts spotted another ship in the darkness and gave alarm. The German ships retreated northwards as the British cruiser Newcastle arrived on the scene. During the battle Rawalpindi managed to broadcast two signals to the British admiralty. The first signal mentioned she had sighted a battlecruiser, the second mentioned she was attacked by the heavy cruiser Deutschland.
238 men died on Rawalpindi, including Captain Kennedy. Thirty-seven men were rescued by the German ships, a further 11 were picked up by HMS Chitral (another converted passenger ship). Captain Kennedy—the father of naval officer, broadcaster and author Ludovic Kennedy—was posthumously Mentioned in Dispatches. Crew members on Scharnhorst and Gneisenau were eligible for the High Seas Fleet Badge for participating in the sinking of Rawalpindi.
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