mumbai 06 14, 2012, 17:20 IST
The BSE Sensex posted its biggest decline in two weeks on Thursday, as lenders such as SBI slumped on expectations the RBI would cut interest rates less aggressively after data showed inflation accelerating.
The wholesale price index inflation rose in May to 7.55 percent from a year ago, though core WPI rose an estimated 4.85 percent, giving some room for the Reserve Bank to cut interest rates in a bid to boost faltering economic growth.
But the RBI is likely to cut the repo rate by only 25 basis points, with perhaps a cut of the cash reserve ratio also in the mix, traders said, and not as aggressively as some investors had initially hoped.
"Expectations on rate cuts have gone down, a 25 basis point cut is already there. Hopes of additional 25 basis point cut are dashed after inflation data," said Mehraboon Irani, Principal and Head of Private Client Group Business at Nirmal Bang Securities.
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The 30-share BSE index fell 1.2 percent to 16,677.88 points, its biggest percentage fall since June 1.
The broader 50-share Nifty declined 1.3 percent to 5,121.45 points.
India's accelerating inflation is the latest in an avalanche of harsh data for the country's beleaguered leaders, following up on weak economic growth seen in the January-March quarter and a ratings downgrade warning from Standard & Poor's.
Though the RBI had warned about inflationary pressures when it cut the repo rate by 50 basis points in April, investors say the central bank will now need to shift focus to slowing growth.
The RBI could also opt to target liquidity via the cash reserve ratio, or the money banks must park with the central bank, though that outcome is seen less certain.
Banking shares, as measured by the NSE banking index, fell 2.9 percent, after having gained 7.3 percent so far this month as of Wednesday's close.
ICICI Bank fell 3.6 percent, while SBI lost 3.4 percent.
Lenders that went ex-dividend on Thursday also posted sharp losses: Axis Bank fell 3 percent, while Bank of Baroda declined 3.54 percent.
Other rate-sensitive sectors, such as auto makers, that had recently outperformed also fell.
Maruti Suzuki India fell 2.5 percent, while Tata Motors declined 4.5 percent, as investors had hoped aggressive rate cuts from the RBI would lower financing costs for vehicle purchases.
Property stocks fell as well, with DLF, India's biggest real estate firm, down 2.2 percent.
Shares in Larsen & Toubro fell 3.9 percent as investors booked profits after the engineering conglomerate surged 15.1 percent this month as of Wednesday's close, compared with a 4 percent rise in the broader NSE index.
L&T shares were also hit as its weighting on the FTSE All-World Index is expected to be reduced as of the close of trading on Friday.
According to Morgan Stanley, the reduced weighting from the FTSE index could lead to fund outflows of $59 million.
(Additional reporting by Abhishek Vishnoi)