BENGALURU (Reuters) -Indian shares plunged, bond yields jumped and the rupee strengthened on Wednesday after the country's central bank announced a surprise increase in its key policy rate to tame inflation, putting an end to ultra-loose monetary policy era.
The Reserve Bank of India's monetary policy committee, in an off-cycle meeting, raised the key lending rate by 40 basis points.
"Globally, inflation is rising alarmingly and spreading fast. Geopolitical tensions are ratcheting up inflation to their highest levels in the last 3 to 4 decades in major economies while moderating external demand," RBI governor Shaktikanta Das said.
The NSE Nifty 50 index fell 2.29% to 16,677.60, while the S&P BSE Sensex dropped 2.29% to 55,669.03, with both indexes posting their biggest intraday percentage loss since March 7.
India's 10-year benchmark bond yield jumped to 7.41%, its highest level since May 2019, after the policy decision, while the rupee strengthened against the dollar to 76.26.
"RBI has sent a clear message that inflation needs to be tackled head-on even if it comes at the cost of growth," said Kunal Kundu, India Economist at Societe Generale.
Among sectoral indexes, Nifty bank index and the finance index fell over 2% lower.
"The rate hike is likely to shrink liquidity in the economy overall. As far as the banks are concerned, the cost of funds is likely to increase so does the cost of deposits. It may translate into net interest margin pressure," said Ajit Kabi, Banking Analyst at LKP Securities.
Nifty realty index lost 3.3%, the worst sector performer among other sub-indexes, indicating higher rates could potentially hurt the sector.
On Wednesday, state-run Life Insurance Corp's $2.7 billion IPO, India's biggest, opened to subscriptions from retail and other investors.
(Reporting by Rama Venkat and Nallur Sethuraman in Bengaluru; Editing by Sriraj Kalluvila and Krishna Chandra Eluri)