The RBI's projection of a lower GDP growth rate this fiscal sent the rupee and stocks tumbling to three-week lows, with the currency dipping below the 60-mark and the key S&P BSE Sensex falling past the 19,500 level.
The rupee declined 106 paise to close at 60.47 against the dollar, completing a two-day fall and erasing gains after the RBI took steps to address exchange rate volatility.
The rupee fell even as the central bank said the recent liquidity tightening measures taken to curb speculation in the rupee will be rolled back in a calibrated manner as stability is restored to the foreign exchange market.
The Reserve Bank of India, in its first quarter review of monetary policy, kept all key rates unchanged and cut the GDP growth forecast to 5.5 per cent for FY14 from 5.7 per cent earlier. It also said the external sector is the "biggest threat" to economic stability and asked the government to take urgent steps to contain the current account deficit.
"The RBI in its monetary policy review kept the policy rates unchanged," said Abhishek Goenka, founder & CEO of India Forex Advisors. "However, the comments by the governor were enough to push the markets and rupee to lower levels. He sounded quite pessimistic on the economic growth outlook."
The 30-share Sensex plunged by 245 points, or 1.25 per cent, to a nearly three-week low of 19,348.34. With almost 60 per cent of the stocks ending lower, investors became poorer by Rs 1 lakh crore.
The broader Nifty index on the National Stock Exchange dipped below the 5,800 level to end with a drop of 76.60 points, or 1.31 per cent, at 5,755.05. The SX40 index on the MCX-SX declined 1.19 per cent.
"The dominant concern at the moment is external stability and lingering inflation risks," said Leif Eskesen, Chief Economist for India & ASEAN at HSBC. "While we expect that the RBI will eventually be able to roll back its liquidity tightening measures as the exchange rate stabilizes, it will likely not happen as quickly as the RBI hopes. This would have implications for growth and the scope as well as timing of further monetary policy easing.
