Mumbai: The Reserve Bank's decision to leave interest rates untouched caught the market by surprise as the Sensex switched gear by reversing its two days of gains and cracked 156 points on Wednesday to close at 26,237.
In his second monetary policy, Reserve Bank Governor Urjit Patel left the repo rate — at which RBI lends to banks for short term — intact at 6.25 per cent and the cash reserve ratio — the share of deposits lenders park with the central bank — at 4 per cent.
The central bank, in its first policy review since the currency switch, lowered GDP growth forecast for 2016-17 to 7.1 per cent from 7.6 per cent, which dealt another blow to sentiment. It said short-term disruption in economic activity and demand compression from the demonetisation effort have led to downside risks to growth.
The 30-share index declined by 155.89 points, or 0.59 per cent, to 26,236.87 after shuttling between 26,540.83 and 26,164.82. The gauge had gained over 162 points in the previous two sessions.
The wider Nifty hit a low of 8,077.50 before recovering partially to settle at 8,102.05, down 41.10 points or 0.50 per cent. It touched a high of 8,190.45 in early trade.
"Markets traded cautiously along the flat line in the first half of trade today, only to witness a sharp drop after, contrary to market expectations, the Reserve Bank of India (RBI) kept the repo rate unchanged at 6.25 per cent," said Karthikraj Lakshmanan, Senior Fund Manager Equities, BNP Paribas Mutual Fund.
The Patel-led six-member Monetary Policy Committee (MPC), which in its first policy meet had cut interest rate by 0.25 per cent in October, this time belied expectations to keep the benchmark repo rate unchanged at 6.25 per cent unanimously.
Interest rate-sensitive banking stocks such as SBI, HDFC Bank, ICICI Bank and Axis Bank reacted strongly, all of which fell by up to 2 per cent.
Out of the 30-share Sensex pack, 25 ended lower while only 5 led by Adani Ports, HDFC, Hero MotoCorp, Tata Motors and M&M finished higher, which cushioned the fall.
Sun Pharma bled by falling 5.96 per cent, followed by TCS 1.47 per cent, Tata Steel 1.40, Lupin 1.33 per cent and ITC 1.17 per cent.
The BSE healthcare index shed 1.70 per cent, followed by realty 1.49 per cent and banking 1.07 per cent.
In line with the trend, the small-cap index retreated 0.51 per cent and mid-cap 0.16 per cent.
On a positive note, foreign portfolio investors (FPIs), who had been net sellers since November 8, bought shares worth a net Rs 161.80 crore on Tuesday, as per provisional data.
Most Asian shares ended higher as investors looked forward to the upcoming policy meeting of the European Central Bank (ECB) for comfort after a referendum defeat tipped Italy into political turmoil.
Japan's Nikkei advanced 0.74 per cent, China's Shanghai index 0.71 per cent and Hong Kong's Hang Seng 0.55 per cent. European markets too were trading in the positive terrain in their early deals.
Frankfurt's DAX 30 gained 1.10 per cent while France Paris CAC 40 climbed 1 per cent. London's FTSE rose 0.7 per cent.
US stocks eked out modest gains yesterday, with the Dow Jones Industrial Average closing at an all-time high for the second day in a row.
Back home, Adani Ports rose 1.86 per cent followed by HDFC 1.74 per cent and Hero Motocorp 1.31 per cent.
"The market had already factored a 25 bps cut in interest rate, hence this status quo has come as a negative surprise for the market. We expect more volatility going forward as commodity prices like oil and metals are inching up and the outlook for rupee remains lacklustre on account of Fed rate hike expectation," said Vinod Nair, Head of Research, Geojit BNP Paribas Financial Services.
The market breadth turned negative as 1,523 shares ended lower, 1,085 closed higher while 181 ruled steady.
The total turnover on BSE went up to Rs 2,549.47 crore, from Rs 2,203.48 crore registered during the previous trading session.
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