The Sensex closed 78 points or 0.42 per cent higher at 18,542 while the Nifty advanced 32 points to 5,610. Earlier, markets had opened gap up for a second straight day following the government's reform announcements on Friday. The Sensex had surged nearly 250 points and the Nifty jumped above the 5,650 mark in early trade.
Investors hoped that the central bank would follow up the government's unexpected spate of bold reform measures by reducing borrowing costs. While the central bank praised the government's long-stalled policy initiatives to bolster growth and shore up its fiscal position, it said the primary focus of monetary policy remained fighting inflation.
Markets were unmoved by the surprise 25 basis point cut in cash reserve ratio, which is the amount of money lenders have to keep with the central bank. A cut in CRR will inject about Rs 17,000 core into the banking system ahead of expected liquidity tightness due to advance tax payments and festive-season demand.
Despite the disappointment, rates sensitive stocks closed with strong gains. The BSE banking index rose 3.2 per cent, the realty index surged 6.2 per cent, while auto stocks closed 1.8 per cent higher.
On the Nifty, rate sensitive stocks like realty major DLF, PSU lender Bank of Baroda, and infra lender IDFC closed 6-7 per cent higher.
The majority of selling came in defensive stocks like FMCG (down 3.7 per cent) and healthcare (down 1.8 per cent) stocks. Tobacco major ITC was the top loser on Nifty, down 5.5 per cent. Drug maker Dr Reddy's declined nearly 4.4 per cent.
Clearly, the rise in risk appetite led to gains in cyclical high beta stocks and a selloff in defensives. IT stocks also saw huge selling pressure. The BSE IT index declined 3.2 per cent tracking considerable appreciation in the rupee. TCS, India's biggest software exporter, shed 5 per cent.
Aviation and retail stocks sustained their momentum despite weakness in the broader markets.
Kingfisher Airlines was locked up, rising 20 per cent at Rs 12.97, while SpiceJet gained 12 per cent. Retail stocks also saw strong buying. Pantaloon Retail traded with 19 per cent gains.
The market breadth weakened though over 60 per cent stocks traded higher on the broader BSE 500.
Global markets also saw cautious trade after the big rally last week following the launch of fresh U.S. economic stimulus.
(With inputs from Thomson Reuters)