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Jun 18, 2012, 12.30 PM IST
The Sensex fell 1% on Monday, led by a sell-off in lenders, after the Reserve Bank of India surprised markets by keeping both the repo rate and the cash reserve ratio unchanged.
Instead, the RBI said it remains concerned about inflation, though the central bank did state it would monitor liquidity conditions, such as by purchasing bonds via open market operations as warranted.
The RBI is still expected to cut interest rates further after last easing the repo rate by 50 basis points to its current 8 percent in April, but the timing is now up in the air.
The focus now also shifts to the government, whose perceived lack of policy reform was a key factor behind the slump in local markets that sent the rupee currency tumbling to a record low in May.
"Rates are headed lower, but cuts are going to be more unpredictable," said Sandeep J. Shah, CEO of investment advisory firm S a mpriti Capital.
"Expectations from the government are at zero, and any significant action would therefore result in short-covering"
The Sensex fell 1%, after erasing earlier gains of as much as 0.9% that had brought the index to its highest since May 4. The Nifty fell 1.1%.
Domestic stocks had rallied 4.5% this month as of Friday's close, after weak GDP data on May 31 had sparked expectations the RBI would cut rates.
Besides keeping interest rates unchanged, the RBI also disappointed investors by leaving the cash reserve ratio at 4.75% after last cutting the amount of money that lenders must keep with the central bank in March.
The surprise outcome sent the NSE banking index tumbling down 2.5% after the sub-index had gained 6.6% this month as of Friday's close.
State Bank of India dropped 3.3%, while ICICI Bank and HDFC Bank fell over 2% each.
Other rate-sensitive stocks also slumped, with property firm DLF down 4% and Unitech down 3.7%.
The BSE Sensex and NSE Nifty erased all early gains after the Reserve Bank of India kept repo rate and cash reserve ratio unchanged in its mid-quarter policy review on Monday.
The BSE Sensex continued to trade above the 17,000 level ahead of credit policy, supported by banks, capital goods, auto, oil & gas and metals stocks. Asian markets remained strong after favourable outcome from Greece's elections.
May 24 2013, 16:42
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May 23 2013, 09:33
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