By Archana Narayanan
MUMBAI (Reuters) - The BSE Sensex fell on Friday, retreating from the three-month high hit on Thursday, after the RBI cautioned it has limited room for further monetary easing, overshadowing the 25 basis point cut in key interest rate.
The RBI cut its benchmark interest rate for the third time since January, as expected, as growth slows and inflation ebbs, but said there is little room to ease monetary policy further, disappointing markets. (To read full story, click http://in.reuters.com/article/2013/05/03/india-economy-rbi-interest-rate-idINDEE9410GP20130503)
Traders said even as the market looks overbought on the back of a stellar rally in April, the focus will now shift to monsoon showers in the country and the flow of global funds after key central banks committed to an easy monetary policy. (For markets weekahead story, click http://in.reuters.com/article/2013/05/03/india-markets-weekahead-idINDEE94207G20130503)
"We expect the commodity prices to correct further or at least remain subdued giving further headroom for rate cuts," said G. Chokkalingam, executive director and chief investment officer, Centrum Wealth Management.
"This, coupled with a normal monsoon as predicted by IMD and other agencies, and the renewed efforts to boost investments by the government, will help strong overseas inflows into stocks and thereby cause a significant recovery in the market," he added.
Chokkalingam expects the S&P Sensex Index to rise 5 percent in the near term.
Foreign investors bought stocks to the tune of $1 billion in April, data from the Securities and Exchange Board of India showed.
The BSE Sensex fell 0.81 percent, or 160.13 points, to end at 19,575.64. It, however, posted a third straight week of gains, adding 1.5 percent.
The Nifty was down 0.92 percent, or 55.35 points, to end at 5944. It gained 1.24 percent in the week.
While MSCI India has already outperformed MSCI Asia ex-Japan since it became one of the cheapest four markets in the region in early March, Credit Suisse said in a report on Wednesday that there is still room for more outperformance.
India's factory output data for March and for the last fiscal year will be watched on May 10.
Credit Suisse said not only does India look cheap relative to the region, but even on an absolute basis, the current price-to-book of 2.02 times is close to the last 3 troughs of 1.95 times.
HDFC Bank Ltd (HDBK.NS), India's No.3 lender by loan value, fell 1.67 percent, State Bank of India dropped 3.72 percent and ICICI Bank (ICBK.NS) fell 3.56 percent.
Among other rate-sensitives auto stocks saw selling, with Tata Motors Ltd (TAMO.NS) ending down 3.95 percent and Bajaj Auto Ltd (BAJA.NS) dropping 2.83 percent.
Shares in Ambuja Cements India Ltd (ABUJ.NS) fell 0.66 percent after the company's March quarter operating margins fell short of analyst expectations.
Jaiprakash Associates Ltd (JAIA.NS) fell 2.97 percent ahead of its March quarter results on Saturday.
JSW Energy Ltd (JSWE.NS) ended 5.13 percent lower after a 49.3 percent rise in its January-March profit failed to enthuse investors.
IT stocks, however, rose on value buying after the recent sell-off. Infosys Ltd (INFY.NS) rose 0.93 percent after a steep fall of 22 percent in April on the back of poor March quarter results, while HCL Technologies (HCLT.NS) gained 2 percent.
Fortis Healthcare Ltd (FOHE.NS) rose 0.44 percent after Nomura upgraded the stock to "buy" from "neutral", citing recent underperformance and improvement in return ratios.
Bharti Airtel Ltd (BRTI.NS) shares gained 0.3 percent after it said it will sell a 5 percent stake to Qatar Foundation Endowment for $1.26 billion to strengthen its capital structure and fund future growth plans. (Full story http://in.reuters.com/article/2013/05/03/bharti-airtel-qatar-foundation-idINDEE94201820130503)
(Additional reporting by Abhishek Vishnoi; Editing by Jijo Jacob)