Bank slide drags Sensex, RBI seen holding rates

(Reuters) - Indian shares fell more than 1 percent on Friday after stronger-than-expected consumer inflation data raised the prospect the central bank would keep interest rates on hold, sending lenders such as State Bank of India sharply lower.

Data released late on Thursday showed annualised consumer price inflation rose at a faster-than-expected pace to 5.39 percent last month, compared with 4.83 percent in March.

The Reserve Bank of India (RBI) has cut interest rates by 150 basis points since last year, including most recently by 25 bps in April, but pinned another rate cut on inflation trends even as separate data released on Thursday showed a struggling economy with industrial output rising much less than expected.

The central bank holds its next policy review on June 7.

Banks were further hit after the RBI said on Thursday the sector would have to make higher provisions for lending to large corporate borrowers above a certain level.

"If inflation remains elevated then RBI's rate cut could get postponed, but on the other hand IIP (industrial output) numbers are soft and typically in such a scenario you would expect the RBI to cut rates. So policy outlook is concerning markets," said Deepak Jasani, head of retail research at HDFC Securities.

The broader NSE Nifty was down 1.3 percent at 7,797.42 as of 0716 GMT, while the benchmark BSE Sensex was 1.28 percent lower at 25,460.13.

But both indexes were still set to post their first weekly gain in three, on earnings results which have so far proven resilient. The NSE index was on track for a gain of 0.9 percent.

Banking stocks dropped on Friday, with the S&P BSE Bankex index shedding 1.5 percent. State Bank of India and ICICI Bank were down 2 percent and 3 percent, respectively.

Dr.Reddy's Laboratories fell 1.7 percent after the country's second largest drugmaker on Thursday posted a near 86 percent slump in March-quarter profit.

Eicher Motors declined 3.6 percent after promoters sold 1.14 million shares, or 4.2 pct stake, for 21 billion rupees.

Among the gainers, Asian Paints rose 1 percent, its second consecutive session of gains, after good March-quarter results.

(Reporting by Aastha Agnihotri in Bengaluru; Editing by Subhranshu Sahu)