Sensex down; bargain buying lifts banks after RBI policy

MUMBAI (Reuters) - The NSE Nifty was trading down 0.2 percent in a volatile session on Tuesday, but bank stocks rose on bargain hunting in the beaten-down sector after the Reserve Bank of India (RBI) left key rates unchanged, as widely expected.

The RBI kept its policy rate on hold at 6.75 percent, opting to wait until after the government's annual budget statement end-February to decide on whether to cut interest rates further.

Traders said bank stocks rallied on short squeeze in the absence of negative news from the RBI policy, adding the next trigger for markets would come from public sector bank results and the federal budget.

"Markets are rangebound at the moment, policy was a non-event," said Arun Kejriwal, founder, Kris Research. "Expect good correction in stocks before pre-budget rally starts."

The broader Nifty swung between losses and gains, falling as much as 0.3 percent before rising 0.6 percent, as traders tried to gauge the policy's impact on the market. It has been largely flat after the announcement.

The benchmark BSE Sensex gained as much as 0.4 percent. It was trading down 0.1 percent.

India's partially convertible rupee was largely steady, trading at 67.86/87 per dollar versus its previous close of 67.84/85. The benchmark 10-year bond yield was up 3 basis points on the day at 7.82 percent.

The Bank Nifty rose as much as 1 percent, led by Bank of Baroda , Punjab National Bank and State Bank of India , which were up between 2 percent and 4 percent.

Telecom major Bharti Airtel gained after brokerages maintained 'buy' rating on the stock.

Among stocks that fell, Sun Pharmaceuticals slipped 1.7 percent, Tata Steel slipped 4 percent, while Vedanta Ltd fell 3.3 percent.

(Reporting by Manoj Rawal; Editing by Biju Dwarakanath)