» Business » Sensex ends 156 points lower as RBI keeps key rates unchanged

Sensex ends 156 points lower as RBI keeps key rates unchanged

By Surabhi Roy
Last updated on: December 07, 2016 16:25 IST
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Bank Nifty pared all its intraday gains to end over 1% lower led by losses in BoB, ICICI Bank, Axis Bank and Bank of India

Benchmark indices ended lower after the RBI unanimously decided to keep the policy rate unchanged at 6.25%, which was much against the street and analysts’ expectations. Meanwhile, the slow pace of recovery in the economy also weighed on market sentiment.

The RBI’s monetary policy document said it decided to pause given the imminent tightening of monetary policy in the US, which is triggering bouts of high volatility in financial markets.

The S&P BSE Sensex ended down 156 points to settle at 26,237 and the Nifty50 settled 41 points lower at 8,102.  The broader markets underperformed the benchmark indices significantly- BSE Midcap and Smallcap indices fell between 0.2%-0.5%.

"Market plunged after an unexpected pause from RBI on key rates while the reduction in GVA from 7.6% to 7.1% in FY17 added a further blow to investors’ sentiment. The market had already factored a 25bps cut in interest rate, hence this status quo has come as a negative surprise for the market. We expect more volatility going forward as commodity prices like oil and metals are inching up and the outlook for rupee remains lacklustre on account of FED rate hike expectation," said Vinod Nair, Head of Research, Geojit BNP Paribas Financial Services.

The Reserve Bank of India on Wednesday fixed the reference rate of the rupee at 67.8707 against the US dollar and 72.7506 for the euro.

RBI Monetary Policy

The six-member monetary policy committee (MPC), headed by the Reserve Bank of India (RBI) governor Urjit Patel, on Wednesday unanimously decided to keep the policy rate unchanged at 6.25%, considering the “heightened uncertainty” of volatility related to US rate hike and the local demonetization drive.

Commenting on Fifth Bi-Monthly Monetary Policy, Bekxy Kuriakose, head – Fixed Income, Principal Pnb Asset Management
said “Belying market expectations, RBI decided to keep key rates unchanged. Bond markets have expectedly reacted negatively given that 25 bps was already factored in with some segments even expecting 50 bps rate cut. RBI has clearly specified they need  data and more time to evaluate the effects of demonetization and clearly do not wish to react disproportionately to “short term transient” effects".

RBI also withdrew incremental cash reserve ratio (CRR) imposed recently on Rs 3.24 lakh crore of deposits, from the fortnight starting December 10. The growth of real gross value added (GVA) in Q2 of 2016-17 turned out to be lower than projected on account of a deeper than expected slowdown in industrial activity.

"Global developments including sharp rise in US treasury yields and expected hike in US Fed funds rate also seems to have weighed on the policy move. And on inflation they seem to have noted the resistance of core inflation (ex food and fuel) to downward impulses," added Kuriakose.

Photograph: Danish Siddiqui/Reuters

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Surabhi Roy in Mumbai
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