Mumbai: The benchmark index 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.
Sensex at opening
Local shares had rallied in June, hitting a six-week high early on Monday’s session, on expectations the RBI would ease policy after recent data showed economic growth in January-March fell to a nine-year low.
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% 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 main BSE index fell 1%, after erasing earlier gains of as much as 0.9% that had brought the index to its highest since 4 May. The NSE’s 50 share index fell 1.1%.
Domestic stocks had rallied 4.5% this month as of Friday’s close, after weak GDP data on 31 May 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%.