Indian shares fell on Monday as state-owned lenders retreated after Urjit Patel was named as the next central bank governor, which was seen as reducing the prospect of rate cuts in the near term and as continuing a push to aggressively clean up bad debt.

Caution also gripped the sentiment as all eyes are set on US Federal Reserve officials annual conference in Jackson Hole this Friday after hawkish comments from key Fed officials last week on Interest rate hike.

The broader NSE index closed down 37.75 points or 0.44 per cent at 8,629.15, after falling 0.07 per cent in the previous session.

The benchmark BSE index ended 91.46 points or 0.33 per cent lower at 27,985.54.

The Nifty Bank index lost 0.43 per cent, with State Bank of India and Punjab National Bank falling 1.4 per cent and 0.6 per cent, respectively.

Barring FMCG and consumer durables, all other BSE sectoral indices ended in the negative zone. Among them, IT index fell the most by 1.07 per cent, TECk 0.9 per cent, auto 0.89 per cent and infrastructure 0.76 per cent, while FMCG index was up 0.62 per cent and consumer durables 0.23 per cent.

Top five Sensex gainers were HUL (+1.94%), ITC (+1.19%), HDFC (+0.59%), Coal India (+0.36%) and Cipla (+0.34%), while the major losers were Lupin (-2.03%), TCS (-2.02%), NTPC (-1.92%), Sun Pharma (-1.63%) and Axis Bank (-1.4%).

Patel's appointment

A deputy governor at the Reserve Bank of India (RBI) since 2013, Patel is due to replace outgoing RBI governor Raghuram Rajan on September 4.

Patel headed a panel that recommended landmark changes to the monetary policy in India, including a switch to inflation-targeting and the creation of a committee to set interest rates, and his views are seen as closely aligned to Rajan's.

As such traders expect Patel to keep the repo rate on hold at the RBI's next policy review on October 4 after inflation accelerated to 6.07 per cent in July, above the RBI's near-term target of 5 per cent.

“Patel is more of an inflation-focused guy and effectively with the inflation rate going up, expectations of a deep rate easing have diminished", said Dhananjay Sinha, head of research at Emkay Global Financial Services.

Under Rajan, the RBI has pushed for increased the recognition of bad debt by state-owned lenders, hitting profitability in the sector.

Banks are also heavy buyers of government bonds, which fell on Monday, with the benchmark 10-year bond yield up 5 basis points at 7.15 per cent.

FII buying

Meanwhile, foreign portfolio investors (FPIs) bought shares worth a net Rs 409.94 crore last Friday, as per provisional data released by the stock exchanges.

The dollar strengthened and US Treasury yields hit a two-week high on Monday on expectations the Federal Reserve will give a signal this week that it is gearing up to raise interest rates.

European markets bounced back on Monday, recovering from a sharp fall over the previous week as Swiss chemical company Syngenta jumped after a bid for it by ChemChina was cleared by a US watchdog.

Asian shares slipped on Monday and the dollar pulled away from last week’s lows on expectations that a signal might emerge from a Federal Reserve gathering this week in Jackson Hole, Wyoming that the US central bank is gearing up to hike interest rates.

US stocks registered small losses last Friday with traders holding their horses ahead of a speech from Federal Reserve chair Janet Yellen at Jackson Hole this week.

A report by IFA Global said: "US stock markets closed in the red, the Dow Jones Industrial Average closed lower by 45 points and Nasdaq index closed lower by 2 points. US equities closed lower on increased Fed rate hike bets and as dollar continues to strengthen. European stock markets closed lower, with FTSE closing lower by 10 points and CAC closing marginally lower by 36 points. European indices traded lower with Italian shares leading the charge lower as concerns over the country's banking system sent lenders lower across the Euro zone. Asian stock markets are trading on a mixed note, with Hang Seng index trading lower by 105 points and Nikkei index is trading marginally higher by 38 follwing weak global cues."

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