The markets continue to exert selling pressure, with auto and banking stocks being the top laggards. The Sensex has now shed 268 points at 18,730. The Nifty has declined 80 points to 5,621.
The BSE Auto and Bankex have both declined over 2 per cent at 9,237 and 12,529, respectively.
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(Updated at 1154 hrs)
After RBI governor D Subbarao's policy reveiew announcement, the markets reacted instantly by slipping a few points, but they rebounded into positive territory, albeit for a very brief period. Close to noon, the markets touched fresh lows, but recovered partially thereafter. The Sensex was quoting at 18,827 down 171 points, while the Nifty was at 5,648 down 53 points.
Strengthening its already hawkish stance on sticky inflation numbers, the Reserve Bank of India announced a 50 basis points hike in repo and reverse repo rates, thus introducing another season of monetary tightening to reign in unabating inflation figures.
Amongst the major losers on the Sensex, state-run State Bank of India, the country's largest lender, bore the brunt of the rate hike, and fell 3% to Rs 2,609, contributing 28 points to the total loss on the Sensex. Larsen & Toubro at Rs 1,569 and Mahindra & Mahindra at Rs 725 shed 2% each. Auto stocks Tata Motors and Maruti Suzuki slipped 2%, while Bajaj Auto shed 1% as rate-sensitive sectors such as auto, realty and banking will come under pressure because of the rate hikes.
Financials HDFC Bank and ICICI Bank slipped 2% and 1% respectively.
Only four of the Sensex 30 components were trading in the green, with Serlite Industries leading the Sensex at Rs 180 up 2%. Infosys at Rs 2,944 added 1%, followed by Reliance Infra at Rs 664 and BHEL at Rs 2,026 both up marginally.
The broader markets partially cushioned the overall fall in the markets. The Mid-cap index at 6,991 and the Small-cap index at 8,573 were trading down by half a per cent each.
Amongst the sectoral indices, the maximum impact of the rate hike was seen in the rate-sensitive counters such as auto, banking and realty.
Owing to the 50 basis points hike, the repo rate now stands at 7.25%, while the reverse repo rate is 6.25%. The CRR is unchanged at 6%.
Savings rates, up from 3.5%, are at 4% now or the first time since 2003.
The rate hike was necessary to contain inflation, said Finance Minister Pranab Mukherjee, with inflation expected to remain elevated in the first half of fiscal year 2011-12.
GDP growth rate forecast for FY12 is within a range of 7.4%-8.5%, despite the consistent rate hikes, which will dent the growth trajectory to a certain extent.
Inflation forecast for FY12 has been kept around 6% with an upward bias. RBI governor D Subbarao said, in a press conference to the media, headline inflation is above the stipulated limit, and there are signs of moderating growth.
The Auto index was the laggard on the BSE sectoral indices chart at 9,241 down 2.3%. Major losers in this space were Mahindra & Mahindra at Rs 714 down 4%, Maruti Suzuki at Rs 1,256 and Tata Motors at Rs 1,197 both off 3%. Bajaj Auto, Bharat Forge, Apollo Tyres and Hero Honda declined 2% each.
"We expect another 50bps hike in policy rates till the end of the year with risks on the upside. As a result we expect lending and deposit rates to go up another 50-100bps over the next few months," said Ashutosh Datar, Economist, IIFL.
Banking stocks saw weakness seeping in again, despite the recovery in performance during the earlier part of the day, as the rate hike is expected to hit their net interest margins by 11 basis points, thus bringing earnings under pressure. The Bankex shed more than 2% at 12,523. Significant losers on this counter were Canara Bank off 4% at Rs 574, Punjab National Bank at Rs 1,110 down 3.5% and SBI at Rs 2,610 down 3%. Axis Bank, Bank of India and Bank of Baroda shed almost 3% each. Sensex heavyweight ICICI Bank let off 2%, as did IDBI Bank and blue-chip HDFC Bank.
The Realty index fell 1.7% to 2,168, with DB Realty as the top loser at Rs 93 and HDIL at Rs 156 both down 3%. Mahindra Lifespaces at Rs 382, Peninsula Land, Unitech and Anant Raj Industries lsot 2% each.
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Adding to his observations about the macro-economic scenario post the rate hike, Datar added, "We expect FY12 GDP growth to decelerate to 7.7%, almost 1 percentage point lower than FY11 GDP growth."