Banking stocks rallied sharply after the RBI's decision. The Bank Nifty rallied 1.8 per cent in trade led by sharp gains in PSU banking stocks. Oriental Bank of Commerce, Bank of India and Canara Bank all rallied more than 4 per cent in trade.
Other PSU banking stocks that gained ground were Allahabad Bank, Andhra Bank and Union Bank of India.
Private sector banks also gained ground with ICICI Bank, Yes Bank among the big gainers.
The Reserve Bank of India today took markets by surprise largely leaving repo rates unchanged, after two successive hikes in a row.
Economists were largely expecting a hike in the repo rate to battle inflation, which for November came in at a hugely elevated level of 11.24% (CPI inflation). Repo rates are rates at which the Reserve Bank of India lends money to banks and any hike in these rates signals a hike in deposit and lending rates by banks.
"Recent readings suggest that headline inflation, both retail and wholesale, have increased, mainly on account of food prices. While CPI and wholesale price index (WPI) inflation excluding food and fuel have been stable, despite a steady and necessary increase in administered prices towards market levels, the high level of CPI inflation excluding food and fuel leaves no room for complacency. There is, however, reason to wait before determining the course of monetary policy. There are indications that vegetable prices may be turning down sharply, although trading mark-ups could impede the full pass-through into retail inflation.
In addition, the disinflationary impact of recent exchange rate stability should play out into prices. Finally, the negative output gap, including the recent observed slowdown in services growth, as well as the lagged effects of effective monetary tightening since July, should help contain inflation," the RBI has stated.