6:00 PM Mumbai, 8:30 AM New York – The Reserve Bank of India set the stage for higher interest rates and cited gathering inflation forces and strength in the banking balance sheets. Stocks in the broader market fell sharply as banks led the decliners. On the earnings front Tata Motors and Wipro gained but TV Today and United Spirits declined.

The Sensex index in India decreased 387.10 or 2.3% to 16,352.40 and CNX Nifty index fell 124.20 or 0.5% to 4,846.70. Among the Sensex 30 stocks, 23 declined and 7 rose.

On BSE trading, 431 stocks advanced, 2,281 declined and 67 were unchanged.

Rupee edged lower 25 paisa to 46.89 against one dollar.

RBI Shifts Focus to Inflation

Reserve Bank of India left its key lending rate unchanged but increased the bank deposit requirements by 1% and asked banks to hold more government bonds. The move was widely expected but the central bank also set the stage higher interest rate after it cited rising inflationary pressures.

The RBI left the repo rate at 4.75% and reverse repo rate at 3.25% and cash reserve ratio of banks unchanged at 5%. The special liquidity ratio was revised to 25% from 24% and the limit for export credit refinance facility was reset to pre-crisis level of 15% from 50%.

The accompanying statement released by the RBI also discussed the need for orderly and early withdrawal of monetary stimulus as there are “clear signs of rising inflation stemming from the supply side.”

Central bank noted in its statement that India remains “supply constrained” unlike most developed nations which are “demand starved.” India is one of the few large economies that have fiscal and current account deficits.

The statement also noted that the central government has completed over 80% of its borrowing needs and raised 319,911 crore rupees and expects to raise additional 62,500 crore rupees by the end of fiscal year in March 2010.

The RBI left its fiscal year economic growth forecast at 6% with upside bias and said it sees modest decline in agriculture. The RBI raised projection of inflation to 6.5% from the earlier estimate of 5%.

Gainers & Losers

Cadila Healthcare Limited added 1.7% to Rs 556.05 after the pharmaceutical company said second quarter net profit surged 39.0% to Rs 131.92 crore compared to net profit of Rs 94.88 crore a year ago.

Era Infra Engineering Limited decreased 2.5% to Rs 191.10 said that it has secured contracts worth two contracts worth Rs 126.33 crore.

GMR Infrastructure Limited decreased 2.7% to Rs 67.15 an infrastructure company said second quarter sales rose 41% to Rs 1,194 crore from Rs 846.8 crore a year ago. Net profit for the quarter fell 43.5% to Rs 53.6 crore compared to net profit of Rs 94.9 crore a year ago.

ICICI Bank Limited fell 4.6% to Rs 847.50 said Singapore controlled Temasek has cut its stake in India''s lender to 5.76% t as of September 30 from 7.6% at the end of June.

Jyothy Laboratories Limited added 1.4% to Rs 141.70 and traded at its one-year high on robust quarterly earnings.

Kalindee Rail Nirman (Engineers) Limited declined 5.5% to Rs 145.55 and the company approved refund of warrant application money received from promoters and other applicants.

Mahindra Lifespace Developers Limited declined 3.7% to Rs 341.80 after the real estate developer said second quarter sales rose 109.4% to Rs 63.5 crore from Rs 30.32 crore a year ago. Net profit for the quarter rose 55% to Rs 17.34 crore compared to net profit of Rs 11.20 crore a year ago.

MIC Electronics Limited plunged 10% to Rs 41.90 said first quarter net profit slumped 54.5% to Rs 11.63 crore.

Power Finance Corporation Limited slipped 0.4% to Rs 226.75 said second quarter net profit surged 93.7% to Rs 637.90 crore.