Markets hit a 14-month high on hopes 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 continued to trade with strong gains. The BSE banking index was up 3 per cent, the realty index surged 5.3 per cent, while auto stocks traded 2 per cent higher.
On the Nifty, rate sensitive stocks like realty major DLF, infra lender IDFC, and private lender ICICI Bank were among the top gainers, rising 5-7 per cent.
The majority of selling came in defensive stocks like FMCG (down 3.4 per cent) and healthcare (down 2 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 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 traded 2.7 per cent lower. TCS and Infosys were among the top losers on the Nifty.
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 traded 11 per cent higher. Retail stocks also saw strong buying. Pantaloon Retail traded with 20 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)