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India's Sensex tanks after federal bank hikes rates

NEW DELHI - India's benchmark Sensex index tumbled 3.9 per cent in trading on Tuesday on heavy selling by funds and investors after the federal Reserve Bank of India hiked its key lending rate to tame inflation.

The 30-share index lost 557.57 points to close the day's trading at 13,791.54 after the RBI announced the hike on Tuesday afternoon in a quarterly review of the monetary policy.

In a bid to rein in record inflation, the RBI increased the repurchase rate, or the short-term inter-bank lending rate, by half a percentage point to 9 per cent, the highest level in over seven years.

The broader S&P CNX Nifty of the National Stock Exchange was also down by 142.25 points to 4,189.85, a loss of 3.28 per cent.

The RBI also increased the minimum cash banks have to retain against deposits. These moves, economists said, would make loans for homes, consumer durables and the corporate sector dearer.

The central bank said the steps to contract money supply in the economy were taken with an aim of reducing inflation touching 12 per cent to 7 per cent by March next year. But Indian industry and economists said that the monetary measures could have adverse implications for the country's investment and growth. "The tightening of money supply may lead to a fall in the overall business confidence with companies postponing their investment plans in the times to come," Associated Chambers of Commerce and Industry (Assocham) said in a statement.