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Sensex Falls 244 Pts After RBI's Move
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The decision threatens to cut short a rally this month that had sent local shares to a six-week high early on Monday.
The gains had been fuelled by hopes the Reserve Bank of India would ease monetary policy after recent data showed economic growth in January-March fell to a nine-year low.
After the close of markets Fitch Ratings cut India's sovereign outlook to "negative" from "stable", saying growth potential would "deteriorate" unless the country implements structural reforms, and citing "limited progress" on fiscal consolidation.
Local shares could see gains further erode should the global risk environment worsen, with a narrow victory by pro-bailout parties in Greece on Sunday having a muted impact because of persistent worries about Spanish and Italian debt problems.
Global investor attention will also shift to the Federal Reserve meeting ending on Wednesday to see whether it takes action to shore up the USeconomy.
"Flows in the market will be determined by events such as Fed meeting and Europe," said C. J. George, managing director at Geojit BNP Paribas.
"If rupee improves then there will be significant inflows. Till then, market will remain sideways,"
The main BSE index fell 1.4 per cent, after erasing earlier gains of as much as 0.9 per cent that had brought the index to its highest since May 4.
NSE's 50-share Nifty fell 1.5 per cent.
The RBI surprised investors by leaving monetary policy unchanged, citing continued concerns about inflation, after last cutting the repo rate by 50 basis points in April.
The focus now also shifts to the government, whose perceived lack of policy reform was a key factor behind the slump in local markets that sent the rupee currency tumbling to a record low in May.
Fitch made the stakes clear by cutting India's outlook, in a repeat of Standard & Poor's action in April, leaving the country under threat of losing its investment-grade rating from both agencies.
"Rates are headed lower, but cuts are going to be more unpredictable," said Sandeep J. Shah, CEO of investment advisory firm Sampriti Capital.
"Expectations from the government are at zero, and any significant action would therefore result in short-covering."
The surprise RBI outcome sent the NSE banking index tumbling down 3.3 per cent after the sub-index had gained 6.6 per cent this month as of Friday's close.
However, broader losses could be contained after the RBI also stated it would monitor liquidity conditions, such as by purchasing bonds via open market operations as warranted.
State Bank of India dropped 4.4 per cent, while ICICI Bank fell 3.5 per cent.
Other rate-sensitive stocks also slumped, with property firm DLF down 4.7 per cent and Unitech down 3 per cent.
Auto makers fell, too, with Tata Motors ending down 1 per cent on dashed hopes lower interest rates would cut financing costs for purchasing new vehicles.
However, Tata Group companies Tinplate Company of India and Tata Sponge Iron rallied after Tata Steel said it would raise stakes in both companies via open exchange offers at a premium to their Friday's close.
Tinplate surged 18.9 per cent, while Tata Sponge Iron rallied 12.6 per cent.
Shares in Aban Offshore rose 2.2 per cent after the Times of India newspaper report the company is looking to sell its thermal power projects, quoting banking sources briefed on the matter.