Financial shares drag index down for second day

Mumbai: The BSE Sensex declined for the second day, closing nearly 1 per cent lower yesterday, with financials leading the fall on concerns their margins could shrink in the near term.

Weak world markets also kept the sentiment subdued. Banks have been raising their deposit rates to fend off tight cash conditions, while building inflation pressure is expected to trigger a hawkish monetary stance by the central bank, a move that could douse demand for loans.

"Deposit rates are shooting up and it doesn't look like lending rates will keep pace with them. This will impact banks' net interest margins," Ambareesh Baliga, vice-president of Karvy Stock Broking, said.

"Also, asset quality is a big concern. And the RBI [Reserve Bank of India] may also hike rates to contain inflation."

The Reserve Bank of India, which had raised rates six times in 2010 before pausing in December, is widely expected to hike key rates at its policy review scheduled for January 25.

The 30-share BSE index closed 0.96 per cent, or 197.62 points, lower at 20,301.10 points, with 24 of its components closing in the red.

Volume was low with only 308 million shares changing hands on the BSE, where declining shares were nearly double the advancing ones.

The benchmark index climbed 17.4 per cent in 2010, backed by record foreign fund investment of $29.3 billion.

Leading lenders State Bank of India, ICICI Bank and HDFC Bank shed between 1.3 per cent and 3.1 per cent.