MUMBAI The BSE Sensex edged lower, falling for a third consecutive session on Tuesday, after hitting its lowest intraday level in two months as lenders such as Axis Bank were hit by an unexpected interest rate hike by the Reserve Bank of India (RBI).
The RBI raised interest rates by 25 basis points in a bid to contain inflation, although it softened the concerns on economic growth by signalling it did not foresee any further near-term monetary policy tightening should retail prices ease as projected.
The RBI had previously raised interest rates by 25 bps each in September and in October, but left policy on hold last month.
Indexes were also hit as Maruti Suzuki Ltd (MRTI.NS) shares slumped 8 percent, posting their biggest single-day fall in 1-1/2 years, after the automaker announced a new plant in Gujarat that would be owned by Suzuki Motor Corp (7269.T).
That would mean Maruti Suzuki would enjoy only marketing margins from the production at the plant, analysts tracking the sector said.
"Markets could remain volatile on surprise rate hike and ahead of Fed meet outcome. Even RBI guidance seems unnecessarily dovish to me," said Phani Sekhar, fund manager at Angel Broking.
The Sensex fell 0.12 percent, or 23.94 points, to end at 20,683.51, to mark its lowest close since December 17, 2013
The broader Nifty lost 0.16 percent, or 9.60 points, to end at 6,126.25.
Both indexes earlier hit their lowest intraday level since November 28.
Shares are expected to remain volatile ahead of the conclusion of the U.S. Federal Reserve two-day meeting on Wednesday amid widespread expectations of a continued wind down in its monetary stimulus.
Overseas investors sold Indian cash shares worth of 13.34 billion rupees on Monday, the biggest single-day sale since August 27 amid turmoil in emerging markets.
Bank shares fell as much as 2 percent after the rate hike but eventually ended down 0.3 percent on the back of the RBI's more dovish statement.
Axis Bank Ltd (AXBK.NS) declined 3.4 percent, while HDFC Bank (HDBK.NS) ended 0.7 percent lower.
Among state-owned banks, Canara bank Ltd (CNBK.NS) fell 1.8 percent, while Bank of India (BOI.NS) lost 0.6 percent.
Local search service provider Just Dial Ltd (JUST.NS) plunged 12.9 percent as its October-December quarter earnings fell short of some analysts' expectations.
However among stocks that gained, Ranbaxy Laboratories Ltd (RANB.NS) rose 2.8 percent on value buying after falling 26 percent over Friday and Monday following a ban by U.S. drug regulator on more of its products.
(Editing by Anand Basu)
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