Sensex falls; state-run banks hit after Patel picked as RBI chief

REUTERS - Indian shares fell on Monday as state-owned lenders retreated after Urjit Patel was named as the next central bank governor, which was seen as reducing the prospect of rate cuts in the near term and as continuing a push to aggressively clean up bad debt.

A deputy governor at the Reserve Bank of India (RBI) since 2013, Patel is due to replace outgoing RBI governor Raghuram Rajan on Sept. 4.

Patel headed a panel that recommended landmark changes to monetary policy in India, including a switch to inflation-targeting and the creation of a committee to set interest rates, and his views are seen as closely aligned to Rajan's.

 

As such traders expect Patel to keep the repo rate on hold at the RBI's next policy review on Oct. 4 after inflation accelerated to 6.07 percent in July, above the RBI's near-term target of 5 percent.

"Patel is more of an inflation-focused guy and effectively with the inflation rate going up, expectations of a deep rate easing have diminished", said Dhananjay Sinha, head of research at Emkay Global Financial Services.

The broader NSE Nifty was down 0.5 percent at 8,622.95 as of 0720 GMT, after falling 0.07 percent in the previous session. The benchmark BSE Sensex was 0.47 percent lower at 27,947.27.

The Nifty Bank index dropped 0.61 percent, with State Bank of India and Punjab National Bank falling 1 percent each. The Nifty PSU Bank index <.NIFTYPSU> was down 0.8 percent.

Under Rajan, the RBI has pushed for increased recognition of bad debt by state-owned lenders, hitting profitability in the sector.

Banks are also heavy buyers of government bonds, which fell on Monday, with the benchmark 10-year bond yield up 5 basis points at 7.15 percent.

Among other losers, Cairn India and Vedanta Ltd shed 2.5 percent and 1.5 percent respectively, after Vedanta co-CEO Tom Albanese told the Financial Express newspaper that its revised offer for a merger with Cairn India was final and would not be sweetened further.

Shares in Welspun India , one of the world's largest textile manufacturers, fell by their maximum daily limit of 20 percent after Target Corp said it was severing ties with the company over a cotton supply dispute.

(Reporting by Aastha Agnihotri in Bengaluru; Editing by Gopakumar Warrier)