By Abhishek Vishnoi
MUMBAI (Reuters) - The BSE Sensex fell to a one-week low on Tuesday, led by a decline in rate-sensitive stocks such as HDFC Bank, after the Reserve Bank of India (RBI) lowered its key policy rate, but made further rate cuts conditional on government moves to control fiscal deficit.
The RBI cut the policy repo rate by 25 basis points to help support an economy set to post its slowest annual growth rate in a decade, and even unexpectedly reduced the cash reserve ratio (CRR) to address the country's liquidity deficit.
The central bank stressed that halting a slide in growth had become critical, but it went on to list constraints, notably worryingly high current account and fiscal deficits, and the risk that inflation could flare again.
The cautious call led indexes to pull back after earlier hitting their highest in two years since January 2011 immediately after the RBI decision.
Analysts said the government's upcoming budget for the fiscal year starting in April would be key in determining the markets' near-term outlook.
"Policy was broadly in-line with market expectations, but there has been a sense of caution mainly due to widening current account deficit and inflation," said Kaushik Dani, Fund Manager at Peerlees Mutual Fund.
"The way budget pans out will determine how RBI formulates its March policy," added Dani.
The Sensex fell 0.56 percent, or 112.45 points, to end at 19,990.90, closing below the psychologically important 20,000 mark.
The index had earlier gained as much as 0.5 percent to its highest intraday since January 6, 2011.
The broader Nifty fell 0.41 percent, or 24.90 points, to end at 6,049.90, marking its lowest close in a week after earlier also hitting a two-year high.
RBI's caution comes ahead of what is expected to be a volatile week, with continued earnings results and the expiry of derivatives on Thursday, while the Federal Reserve is set to conclude its two-day meeting on Wednesday
Rate-sensitive stocks fell after the RBI made further rate cuts conditional on government's efforts towards fiscal consolidation, making hopes of aggressive easing cycle this year highly improbable.
Among banking stocks, HDFC Bank
Real estate developer DLF
Oil and gas stocks declined on profit-taking, with Oil and Natural Gas Corp Ltd
Century Textiles & Industries Ltd
However, among stocks that gained, Axis Bank
Adani Ports and Special Economic Zone Ltd
Adani Port's stake sale in its Australian port would reduce the Indian company's consolidated debt by around 110 billion rupees, while the reinvestment of the cash flows for domestic growth opportunities would be a positive, brokerage Edelweiss says in an email to clients.
(Additional reporting by Manoj Dharra; Editing by Anand Basu)