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The central bank maintained status quo on repo rate - the key interest rate at which it lends short-term funds to commercial banks, surprising the Street. Caution prevailed in the run-up to the much-awaited policy decision from the inflation-targeting RBI, amid expectations of a 25-basis-point rate hike, according to analysts.
"Status quo on the policy rate has come as a surprise to the markets" even though the recent inflation readings were below the Q2 projections by the Monetary Policy Committee, said Aditi Nayar, principal economist at credit ratings agency ICRA.
The panel however, shifted its policy stance to "calibrated tightening" from "neutral", which means a rate cut is off the table for now.
"This is a risky move by the RBI since the market was positioned for a rate hike, purely as a rupee defence. In its absence currency and asset markets could see sharper corrections," said HDFC Bank chief economist Abheek Barua.
Overall breadth of the markets was strongly negative, with 1,359 stocks on the Nifty 50 closing lower against 402 moving higher. On the BSE, 701 stocks advanced against 1,950 that declined for the day.
The Nifty Energy - a sectoral index on stock exchange NSE - ended 8 per cent lower. Other than the three PSU fuel retailers, ONGC, GAIL and Reliance Industries fell 14.7 per cent, 10.3 per cent and 6.5 per cent respectively. The selloff in energy sector shares came a day after the government announced a reduction of Rs 2.50 per litre in petrol and diesel prices, in some relief to the consumer after fuel prices had touched all-time highs in many parts of the country.
Wednesday's move by the government forces oil retailers to bear the burden of fuel price reduction for the first time since deregulation of diesel in 2014. The price cut sparked fears of the country going back toward the regulated regime - in which the prices of petrol and diesel were controlled by the government. Soaring crude oil prices along with depreciation of the rupee in the forex market has made imports more expensive. India meets more than 80 per cent of its oil requirement through imports.
Rate-sensitive sectors such as financials, auto and realty were under pressure. The banking, financial services, auto and real estate sub-indices finished 1.5 per cent, 2.5 per cent, 3.2 per cent and 2.5 per cent lower.
On the other hand, mild gains in IT stocks limited the downside, with the Nifty IT closing 1 per cent higher. Weakness in the rupee boosts profitability of exporters such as IT companies.
The Sensex and Nifty lost 2,149 points and 691 points - around 6 per cent - in three days respectively.
(With agency inputs)