By Himank Sharma and Rafael Nam
MUMBAI (Reuters) - The BSE Sensex slumped for a second straight session on Wednesday as a forecast for lower-than-expected monsoon rains raised concerns that the Reserve Bank of India (RBI) will not cut interest rates any more this year, sending lenders such as State Bank of India sharply lower.
Midcap infrastructure and property developers also bore the brunt of the sell-off, with Unitech Ltd losing 35.7 percent as investors were worried that companies would find it difficult to reduce debt levels should the central bank hold off on rate cuts.
Although the RBI cut interest rates on Tuesday, it issued a cautious statement on inflation that soured sentiment. Those concerns were reinforced when India cut this year's monsoon forecast to 88 percent of the long-term average, raising fears of the first drought in six years.
A Reuters poll before the RBI's policy review on Tuesday had showed analysts were previously expecting an additional rate cut of 25 basis points later this year.
"There's real pain in the industrial economy," said G. Chokkalingam, founder of Equinomics, a Mumbai-based research and fund advisory firm.
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"These infrastructure companies have a historic burden of over-leveraging. In addition to that, you have stagnation of the industrial economy and market perceptions that rate easing will not happen. All these factors took a toll on these stocks."
The benchmark BSE Sensex fell 1.3 percent to 26,837.20, its lowest close since May 7, after slumping 2.4 percent on Tuesday.
The Nifty fell 1.2 percent to 8,135.10, its lowest close since May 12. It had dropped 2.3 percent on Tuesday.
Lenders were among the leading losers, with State Bank of India, the country's top lender by assets, falling 3.3 percent. ICICI Bank Ltd, India's biggest private sector lender, dropped 2.9 percent.
Meanwhile, midcap infrastructure and property developers were hit hard by market speculation that some companies were facing repayment defaults. Jaiprakash Associates Ltd slumped 20.7 percent, while Unitech Ltd lost 35.7 percent even as both companies denied that they were facing such issues.
Bond markets also reeled from waning hopes about rate cuts. The benchmark 10-year bond yield rose 2 basis points to 7.95 percent, after earlier rising to as high as 7.99 percent, a three-week high. Since Monday's close yields have risen 15 bps.
(Additional reporting by Aman Shah in MUMBAI and Tommy Wilkes in DELHI; Editing by Subhranshu Sahu)