Equity benchmark indices fell to their lowest in nearly two weeks and bond yields jumped on Wednesday after the central bank hiked its key policy rate as widely expected to tame sticky pricing pressures.
The Reserve Bank of India raised the key lending rate by 50 basis points to 4.90 per cent after an unscheduled 40 basis point hike in May.
The NSE Nifty 50 index was 0.19 per cent lower at 16,385.10 by 0446 GMT, while the S&P BSE Sensex was down 0.23 per cent to 54,982.98. Both indexes had fallen more than 0.70 per cent after the central bank's decision.
The benchmark 10-year bond yield briefly jumped to 7.562 per cent, its highest since March 14, 2019, before trading at 7.50 per cent after the policy decision. The rupee was at 77.6925 against the dollar.
"The 50-bps repo rate hike comes on the back of persistently elevated inflation and continued upside risks," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
"Given that inflation is expected to remain above 6 per cent through 3QFY23, the RBI has to front-load actions. We continue to see another 60-85 bp hikes in rest of FY23 to manage inflationary expectations."
Economists polled by Reuters had expected the Reserve Bank of India to raise the key lending rate by 25 to 75 basis points.
While inflation looks set to remain elevated, mainly driven by high global energy and food costs, economic growth prospects have started to look bleak. Gross domestic product growth slowed to its weakest in a year last quarter on a year ago, the third consecutive slowdown.