MUMBAI The Sensex fell more than 1.5 percent on Friday after a surprise rate hike by the Reserve Bank of India (RBI) led to a slide in rate sensitive stocks such as banking and auto.
RBI Governor Raghuram Rajan surprised markets in his maiden policy review on Friday by raising interest rates to ward off rising inflation, while scaling back some of the emergency measures put in place to support the ailing rupee.
The NSE banking index fell 4.14 percent, wiping off most of Thursday's gains when banks rallied on the U.S. Federal Reserve's unexpected decision to not scale back its $85 billion-a-month bond purchases.
"What's clear now is that Raghuram Rajan is very focused on containing inflation and currency, and that means high interest rates until we see prices coming down and a greater fiscal discipline," said Aneesh Srivastava, Chief Investment Officer, of IDBI Federal Life Insurance.
Rajan, who took office early this month amid India's worst economic crisis since 1991, increased the RBI's policy repo rate by 25 basis points (bps) to 7.50 percent, defying widespread forecasts that he would leave the rate on hold to bolster a sluggish economy, choosing to focus on containing the rising food prices.
The Sensex ended 1.85 percent lower at 20263.71, while the Nifty closed down 1.69 percent at 6012.10.
Among large cap banks, ICICI Bank Ltd(ICBK.NS) fell 4.73 percent, while shares of Punjab National Bank(PNBK.NS) dropped 7.41 percent.
Shares in two smaller lenders, Dena Bank(DENA.NS) and Vijaya Bank(VJBK.NS), added to their losses after the National Stock Exchange excluded them from its derivatives segment.
Stock prices of other companies that stand to lose in a high-interest rate environment also took a hit.
Automakers fell, with Tata Motors(TAMO.NS) closing 3.08 percent lower, Hero MotoCorp Ltd(HROM.NS) falling 2.84 percent and Bajaj Auto Ltd(BAJA.NS) falling 2.96 percent.
Shares in top consumer goods maker Hindustan Unilever Ltd(HLL.NS) closed 3.92 percent lower on worries that its sales volume growth may decelerate for the July-September quarter, several dealers said.
(Editing by Anupama Dwivedi)