Indo Pak tension escalates as India set to emerge favoured destination for global defence sector players!Global economy is bound to be inflicted with the slowdown in developed globe. Budget will outline amendments to Constitution on GST, Chidambaram declared at home.Don’t impose higher tax on rich, industry tells govt.Government will contain fiscal deficit, pursue reforms!Government's immediate priority is keeping the investment cycle going!

Indo Pak tension escalates as India set to emerge favoured destination for global defence sector players!Global economy is bound to be inflicted with the slowdown in developed globe. Budget will outline amendments to Constitution on GST, Chidambaram declared at home.Don't impose higher tax on rich, industry tells govt.Government will contain fiscal deficit, pursue reforms!Government's immediate priority is keeping the investment cycle going!
Troubled Galaxy Destroyed Dreams, chapter:835
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Government will contain fiscal deficit, pursue reforms!he government will take all steps to contain fiscal deficit and pursue reforms to deal with economic challenges, Finance Minister P Chidambaram said today. Government's immediate priority is keeping the investment cycle going, Finance Minister P Chidambaram told the industry which asked the Centre not to consider imposing higher taxes on high income individuals. Indo Pak tension escalates as India set to emerge favoured destination for global defence sector players!Earlier on Tuesday, Prime Minister Manmohan Singh broke his silence and gave a tough message to Pakistan that it cannot be business as usual in the aftermath of the beheading of an Indian soldier on the line of control last week.He emphasised that those responsible for the "barbaric act" of beheading of Lance Naik Hemraj will have to be brought to book and hoped "Pakistan realises this".Public outrage and demands from political parties for a muscular response to mutilation of bodies of two jawans by the Pakistan army has prompted the government to put its Pakistan policy on pause, with Prime Minister Manmohan Singh asserting that it "cannot be business as usual" with Islamabad.

After this barbaric attack, there cannot be business as usual with Pakistan. Those who are responsible for this (mutilation of bodies) must be brought to book," Singh told reporters. The prime minister also said that the Pakistani action at the line of control was unacceptable. "Hope Pakistan realises its mistake," he said.

A sharp slowdown in the Indian economy has weakened the growth rate of South Asia, the World Bank has said in another  report.However,India is poised to become a favourite destination for global defence sector players with the total offset opportunity for the commercial segment in the country set to cross the $10-billion mark in 2013. With the Government expected to raise the foreign investment limit in the defence sector to 49 per cent from 26 per cent this year, the country is likely to witness a rush of investments, according to a recent study by Deloitte.According to the Deloitte Aerospace and Defence Outlook 2013, while the global defence industry is expected to shrink, growth in the Indian defence sector is on the surge. "India continues to be one of the promising aerospace and defence (A&D) markets due to the increasing demand for A&D equipment from the armed forces," the Deloitte report says.The report entails that milestones in certain deals are expected to be achieved in 2013, such as submarines, missiles, and the Indian Air Force Medium Multi-Role Combat Aircraft (MMRCA) and new joint ventures are likely to be signed between Indian private and overseas companies.

According the Global Economic Prospects 2013, released on Tuesday, economic growth in the region dropped to an estimated 5.4 per cent in 2012 from 7.4 per cent in the previous year.

This is mainly due to a sharp slowdown in India, where the GDP growth is forecast at 5.4 per cent in the fiscal year ending March 2013, the Bank said.

It added that weak global demand exacerbated region-specific factors, including subdued investment growth, electricity shortages, policy uncertainties, and a weak monsoon.

"Regional GDP is projected to grow by 5.7 per cent in the 2013 calendar year, and by 6.4 and 6.7 per cent in 2014 and 2015, respectively, driven by policy reforms in India, stronger investment activity, normal agricultural production, and improvement in export demand.

Growth in India (at factor cost) is projected at 6.4 per cent in the 2013 fiscal year, rising to 7.3 per cent by 2015," the report said.

"The fiscal consolidation roadmap for Centre has been laid out and the government will not breach the Fiscal Deficit limits," he said during pre-Budget consultations with state Finance Ministers.

The government has chalked out a plan to restrict the fiscal deficit to 3 per cent of GDP by 2016-17.

Chidambaram highlighted the challenges before the economy and the urgency of reform measures needed to address them.

"The second major challenge that the economy faces is the high Current Account Deficit (CAD) level," he said, adding that foreign investment is not an option but an economic imperative.

He also asked the states to fast track clearances needed for investment proposals. An official release said that he felt that if "we take concrete measures to tackle these challenges, next year would be a better year".

Meanwhile, sources said that Chidambaram told the state Finance Ministers that he will outline amendments to the Constitution on the Goods and Services Tax (GST) in his Budget speech if there is consensus among the states on the issue.

On the issue of states' demand of more compensation for reduction in the Central Sales Tax (CST), states were told that the Centre was open to the idea, but all would depend on the fiscal situation, sources said.

The two committees - one on the CST compensation issue and the other on the design of the GST - will submit reports to the Centre on January 21.


Global economy is bound to be inflicted with the slowdown in developed globe.Budget will outline amendments to Constitution on GST, Chidambaram declared at home.Don't impose higher tax on rich, industry tells govt.The government, on Tuesday, announced its approval to four foreign direct investment (FDI) proposals envisaging a total capital inflow worth Rs.1,286.75 crore, the lion's share of which is accounted for by Hospira Healthcare's plan to induct foreign equity.Based on the recommendations of Foreign Investment Promotion Board (FIPB) in its meeting held on December 31 last year, the government has given the go-ahead to U.S.-based Hospira Inc., Singapore-based Hospira Pte Ltd. and Hospira Healthcare India Pvt. Ltd. to induct foreign equity in to Indian company, which will acquire manufacturing facilities in the pharmaceuticals sector.The total capital inflow envisaged in the joint application through this deal is put at Rs.1,194.75 crore.Meanwhile,seeking to set at rest the concerns expressed by worried investors at home and abroad, the government on Monday announced the postponement of the implementation of the controversial GAAR (General Anti Avoidance Rules) by two years to April 1, 2016.The postponement and other modifications in GAAR provisions marks the acceptance of the recommendations of the Parthasarathi Shome Committee, which was set up by Prime Minister Manmohan Singh following concerns expressed by investors on the Budget provision in this regard and the subsequent withdrawal of portfolio investment by foreign investors.


Nidhi Goyal, Director, Deloitte Touche Tohmatsu India Pvt Ltd added, "The global defence industry can take advantage of the promising Indian aerospace and defence market owing to the increasing demand for A&D equipment from the armed forces."

The Government will focus on indigenisation with the increasing presence of Indian companies and giving cost advantages relating to basic design and engineering services, components, and assemblies manufacturing. Indian companies will also succeed with the help of foreign companies which creates a benefit for both. Once indigenous manufacturing takes root, research and development for the indigenous military industry and civil aircraft is likely to be the other focus area of the Indian Government, the report added.

Goyal further remarked, "Due to the huge offset requirement and the Indian Government's objective of building up an indigenous manufacturing base, the global industry has the opportunity to integrate with the Indian industry to set up their manufacturing lines in India, which could be achieved either through joint ventures or collaborations."

Offset contracts valued at more than $4.5 to $5 billion have been signed by Indian companies with foreign companies since the offset policy came into effect in 2005. However, with the new offset guidelines of 2012 and the assumption of a formal civil offset policy, the total offset opportunity for the commercial segment is valued at $10-15 billion.


"...there are some positive signs in the economy but no discernible trend so far," Chidambaram said during his pre-Budget consultations with industry and trade here.

According to an official release, the Finance Minister said both domestic and foreign investments are not an option but an economic imperative for the government.

"...immediate priority of the government is to keep the investment cycle going," he said. The Cabinet Committee on Investment has been constituted to resolve inter-ministerial issues and to speed-up the clearances of projects, he added.

The industry asked the government not to consider imposing higher tax on high income individuals, saying it would discourage entrepreneurship, while seeking continuance of the existing tax rates.

It also cautioned the government against imposition of Inheritance Tax and said such a step would penalise savings and investments and discourage capital formation.

"A higher rate of tax on high income group taxpayers is uncalled for as this would discourage entrepreneurship. It could lead to professionals relocating to low tax domiciles such as Singapore," FICCI President Naina Lal Kidwai said.

In a clear message that current strain could impact trade ties, India today told Pakistan economic engagement can be enhanced in an environment of peace and stability and asserted "anything which undermines that environment is not conducive" for economic relations.

The remarks by Commerce and Industry Minister Anand Sharma came a day after Prime Minister Manmohan Singh's tough message to Pakistan that it cannot be "business as usual" in the aftermath of the beheading of an Indian soldier on the Line of Control last week.

Sharma's comments, ahead of the Annual Partnership Summit to be held in Agra from January 27, also assume significance given the fact that no bilateral meeting is scheduled between Sharma and his Pakistani counterpart Makhdoom Amin Fahim, who is travelling to India for the business meet.

On the other hand,the Planning Commission, on Monday, made a case for lowering of interest rates to attract investments and reverse the declining trend of economic growth.

"...lowering interest rates and reduction in fiscal deficit is important for the stabilising and growth of the economy," Planning Commission Deputy Chairman Montek Singh Ahluwalia said, while delivering the 15th JRD Tata Memorial Lecture.

The Reserve Bank is slated to announce its monetary policy review on January 29, amid industry demand for lowering of interest rates to spur growth.

Industry leaders, on Wednesday, asked the government not to consider imposing higher tax on high income individuals, saying it would discourage entrepreneurship, while seeking early implementation of the Goods and Services Tax (GST) and continuance of the existing corporate tax rate.

At a pre-Budget meeting with Finance Minister P. Chidambaram, representatives of industry chambers, including the Confederation of Indian Industry (CII), the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Associated Chambers of Commerce and Industry of India (Assocham), also cautioned the government against imposition of inheritance tax, saying such a step would penalise savings and investments and discourage capital formation.

"A higher rate of tax on high income group taxpayers is uncalled for as this would discourage entrepreneurship. It could lead to professionals relocating to low tax domiciles such as Singapore, Dubai or London," FICCI President Naina Lal Kidwai said. For personal income taxes, FICCI recommended that the maximum rate of 30 per cent be made applicable for an income above Rs.20 lakh (as against the existing threshold of Rs.10 lakh).

Expressing similar views, Assocham President Rajkumar Dhoot said: "Nowhere in the world this happens. Our opinion is tax them (the rich) but tax them reasonably. They have money and with that money they invest in the country, which generates jobs. The investments from the rich men also give excise duties, sales tax and, hence, generate revenues also."

Commenting on the issue, CII President Adi Godrej said: "We have said that any increase in taxes (on rich) will create a negative perception on investment and therefore should be avoided."

"We used to have 90 per cent rate of taxes and used to have 3 per cent of growth. Lower rates of taxes have been known to give higher collection. Absolute collection should increase," Mr. Godrej said, adding that taxing the rich more and inheritance tax were phenomenon of developed economies. On the issue of GST, Ms. Kidwai said the Centre should reach out to State governments and come out with a clear plan of implementation and timing at the earliest.

Mahindra & Mahindra Chairman Anand Mahindra said, "Mr. Chidambaram's specific request to industry was to provide ideas by which investments could be revived both foreign and domestic.


The World Bank has asked the developing countries like India and Brazil to safeguard their economic growth, given that the world economy remains fragile and growth in high-income countries is weak four years after the onset of the global financial crisis.A frustratingly slow economic recovery in developed nations is holding back the global economy, the World Bank said on Tuesday, as it sharply cut its outlook for world growth in 2013.The World Bank forecast that global gross domestic product will inch up 2.4 percent this year, from 2.3 percent in 2012. In its last forecast in June, the bank projected global growth would reach 3.0 percent in 2013.Developing countries need to focus on raising the growth potential of their economies, while strengthening buffers to deal with risks from the euro area and fiscal policy in the US, the Bank said in its latest report Global Economic Prospects (GEP), which was released on Tuesday.While financial markets were buoyed by measures adopted last year to address the euro-zone debt crisis, the World Bank urged Washington to outline a credible medium-term fiscal plan that "avoids episodes of brinkmanship" over raising the country's self-imposed debt ceiling.The White House and the U.S. Congress did agree at the beginning of January to extend tax cuts for American families earning less than $450,000 a year as part of a deal over the so-called fiscal cliff. But lawmakers must still navigate the debt limit as well as thrash out a deal over drastic automatic sending cuts that were postponed until March 1.

Emerging economies are set to grow faster than the developed economies over the next four decades and India is likely to become one of the three largest economies by 2050, says a PwC report quite contrararily.

According to the report 'World in 2050 The BRICs and Beyond: Prospects, challenges and opportunities', the global financial crisis has accelerated the shift of the economic centre of gravity and China is expected to surpass the United States to become the largest economy in the world by 2050.

By the year 2050, China, the US and India are likely to be the three largest economies in that order, while Brazil could overtake Japan to be the fourth largest economy.

Turkey could emerge as one of the largest European economies, while Indonesia, Nigeria and Vietnam could climb the ladder strongly, the report said.

However,fuel supply risks and precarious financial health of electricity distribution companies continue to pose challenges for the power sector, whose slow progress could impact the country's economic growth, a report said on Wednesday.

India Ratings & Research, part of global major Fitch Group, also cautioned that expected investments worth Rs 1,75,000 crore in various power projects could turn into non- performing assets unless fuel issues are resolved.

"Non availability of sufficient power as well as insufficient power generation capacity addition could impact the country's overall economic growth," India Ratings & Research Director (Corporates) Salil Garg said.

For every one percent increase in Gross Domestic Product (GDP), the power generation need to increase by one percent. Otherwise, there would be inadequate electricity supply that can impact not just the power sector but also other industries.

"The progress of reforms in the power sector is happening at a slow pace. The sector is expected to suffer this year (also) and investors are not likely to be enthused to put money into the sector," Garg noted.

Indian economy is projected to grow at a slower pace, in the range of 5.7-5.9 percent, this fiscal.

India, which has an installed power generation capacity of over 2,00,000 MW, expects to add about 88,000 MW in the current Five-Year Plan ending March 2017.

The report '2013 Outlook: Indian Power', co-authored by Garg and released today, said that fuel risks -- coal and gas -- along with uncertainties about financial viability of distribution companies (discoms) remain major issues.

Huge tariff hikes - required to revive discoms - can't be expected this year as many states have already increased them significantly in recent times, Garg said. Tamil Nadu has raised tariffs by as much as 27 percent.

Acute fuel scarcity is already hurting power generation. Coal India, the largest supplier to power plants, has not inked any Fuel Supply Agreements (FSAs) since FY 2009.

The report said: "The 114 FSAs for plants commissioned post FY09 and likely to be commissioned till FY15 have a total cumulative capacity of 51,000 MW and with letters of assurance quantity of 216 million metric tonnes (mMT).

"Assuming only 65 percent to be met through domestic coal, Coal India will have to increase its dispatch to the power sector to 436 mMT by FY15 (a Compound Annual Growth Rate of 12 percent), which looks difficult."

The total investment required for 51,000 MW, including debt and equity, would be around Rs 2,75,000 crore. With fuel risks, there is a possibility of debt portion - of around Rs 1,75,000 crore - becoming non-performing assets for banks and financial institutions, Garg noted.


Finance Minister P. Chidambaram on Wednesday said he would outline amendments to the Constitution on the Goods and Services Tax (GST) in his Budget speech if there is consensus among states on the issue.

At his pre-Budget consultations with Finance Ministers of states, he is understood to have said that it was time to wrap up lose ends on GST.

Sources said Mr. Chidambaram told them that he was ready to include the outlines of the amendment in his Budget speech if there is consensus among states.

Budget 2013-14 will be presented on February 28.

The Constitution (Amendment) Bill, 2011 has been introduced in Parliament and is currently under examination by the Standing Committee on Finance.

On the issue of states' demand of more compensation for reduction in the Central Sales Tax (CST), states were told that the Centre was open to the idea, but all would depend on the fiscal situation, sources said.

The two committees -- one on the CST compensation issue and the other on the design of the GST -- will submit reports to the Centre on January 31.

Mr. Chidambaram also reiterated that the Centre was committed to stick to the fiscal roadmap and intends to restrict the fiscal deficit to 3 per cent of GDP by 2016-17.

He also asked states to give speedy clearance to projects falling in their jurisdictions to speed up investments.

After the meeting, Bihar Finance Minister and Chairman of Empowered Committee of State Finance Ministers Sushil Kumar Modi said all the states demanded compensation for reduction in the CST to two per cent from the earlier four per cent.

"All states raised their own issues, but there were certain issues which were raised by all of them," he said.

Among other common issues, Mr. Modi said states demanded implementation of recommendations of B.K. Chaturvedi committee on central sponsored schemes.

States want that their contribution in central schemes should not be more than 15 per cent and also reduction in the total number of such programmes.

Several states said that while they were in favour of direct cash transfer of benefits, the banking network needs to be expanded especially in the rural areas.

Mr. Modi said there was also demand that states having good debt to GDP ratio should be allowed to borrow up to 4 per cent of their GSDP. The FRBM Act limits states' borrowings to 3 per cent of their GSDP.

Madhya Pradesh Chief Minister Raghavji said the states demanded that 33 services should be included into the 'negative list' of Service Tax. Services falling in the negative list do not attract service tax.

During the consultations, Finance Minister of Tamil Nadu O Panneerselvam said states should be allowed to "dovetail" the funding of Rashtriya Swasthya Bima Yojana with State Public Health Insurance Scheme and Central government's share in Old Age Pension scheme should be increased to at least Rs 750.

Meanwhile, Mr. Modi said a meeting of Empowered Committee (EC) of State Finance Ministers will take place in Bhubaneshwar on January 28 and 29.

Among other things, it will discuss the recommendations of the two committees on GST related issues.

GST, which will empower the Centre and states to simultaneously tax supply of goods and services, was to be introduced from April 2010, but has missed several deadlines.


Andrew Burns, lead author of the bank's Global Economic Prospects report, said that a recovery the bank had anticipated last year was now expected "closer to the end of the first quarter and into the second quarter of 2013, rather than beginning a little earlier."

The Bank warned that a drawn-out political battle in the United States over raising the government's borrowing limit and spending cuts could hit growth, spark a loss of confidence in the U.S. dollar and unnerve financial markets.

The World Bank also cut its forecast for developing countries, which last year grew at their slowest pace in a decade, to 5.5 percent in 2013 from 5.9 percent in the June forecast. It said growth in these countries should slowly pick up, reaching 5.7 percent next year and 5.8 percent in 2015.

Before the global financial crisis hit in 2007, developing countries as a whole were chalking up growth rates of around 7.5 percent, with China growing at an annual rate of 10 percent.

The World Bank forecast that Chinese growth would reach 8.4 percent this year, slowing to 7.9 percent by 2015.

In comparison, growth in advanced economies should reach a very weak 1.3 percent this year, weighed down by spending cuts, high unemployment and weak consumer and business confidence, the World Bank said. Activity should strengthen next year to 2 percent and 2.3 percent in 2015.

"The economic recovery remains fragile and uncertain, clouding the prospect for rapid improvement and a return to more robust economic growth," World Bank Group President Jim Yong Kim said.

"Developing countries have remained remarkably resilient thus far. But we can't wait for a return to growth in the high-income countries, so we have to continue to support

developing countries in making investments in infrastructure, in health, in education.

This will set the stage for the stronger growth that we know that they can achieve in the future," he said.

According to the World Bank report in 2012, developing countries recorded among their slowest economic growth rates of the past decade, partly because of the heightened euro area uncertainty in May and June of 2012.

Since then, financial market conditions have improved dramatically.

International capital flows to developing countries, which fell 30 per cent in the second quarter of 2012, have recovered and bond spreads have declined to below their long-term average levels of around 282 basis points, it said.

Developing-country stock markets are up 12.6 per cent since June, while equity markets in high-income countries are up by 10.7 per cent.

However, the real-side of the economy has responded modestly. Output in developing countries has accelerated, but is being held back by weak investment and industrial activity in advanced economies, the report said.

"With governments in high-income countries struggling to make fiscal policies more sustainable, developing countries should resist trying to anticipate every fluctuation in developed countries and, instead, ensure that their fiscal and monetary policies are robust and responsive to domestic conditions," Senior Vice President and Chief Economist at the World Bank Kaushik Basu said.

The World Bank estimates global GDP grew 2.3 per cent in 2012, compared with last June's expectation of 2.5 per cent.

Growth is expected to remain broadly unchanged at 2.4 per cent growth in 2013, before gradually strengthening to 3.1 per cent in 2014 and 3.3 per cent in 2015, the report said.

Developing-country GDP is estimated to have grown 5.1 per cent in 2012, and is projected to expand by 5.5 per cent in 2013, strengthening to 5.7 per cent and 5.8 per cent in 2014 and 2015, respectively.

Growth in high-income countries has been downgraded from earlier forecasts, at 1.3 per cent for 2012 and 2013, firming to 2.0 per cent in 2014 and 2.3 per cent by 2015, it said.

Growth in the Euro Area is now projected to only return to positive territory in 2014, with GDP expected to contract by 0.1 per cent in 2013, before edging up to 0.9 per cent in 2014 and 1.4 per cent in 2015.

Overall, global trade of goods and services, which grew only 3.5 per cent in 2012, is expected to accelerate, expanding by 6 per cent in 2013 and 7 percent by 2015, the
report said.

"The weakness in high-income countries is dampening developing-country growth, but strong domestic demand and growing South-South economic linkages have underpinned developing country resilience - to the point that, for the second year in a row, developing countries were responsible for more than half of global growth in 2012," said Hans Timmer, Director, Development Prospects Group, World Bank.

Govt seriously considering revising auto, LPG rates: Moily

The government is "seriously" considering revising rates of auto and cooking fuels but no decision has been taken as yet, Oil Minister M Veerappa Moily said on Wednesday.

"All price hike or price reduction... Proposals are under serious consideration. We have not taken any decision," he told reporters here.

The ruling UPA's political leadership is holding consultations on options like raising diesel and LPG prices to cut an unprecedented Rs 1,60,000 crore revenue loss expected from selling auto and cooking fuel below cost this fiscal.

He refused to be drawn into what his ministry was proposing or when and at what forum would such a decision be taken.

"What Cabinet will discuss, that is a matter which I cannot disclose. What Cabinet proposal will be there, I dont think it is a matter of discussion here," he said.

The Ministry is suggesting revision in diesel, domestic cooking gas (LPG) and kerosene rates to the Cabinet Committee on Political Affairs based on recommendation of the Vijay Kelkar Committee, which was appointed by the Finance Ministry to suggest a roadmap for fiscal consolidation.

"(Kelkar Committee) report has already been submitted. He has given number of proposals. That is under serious consideration of the government," Moily said.

The panel had recommended an immediate hike in price of diesel by Rs 4 per litre, of kerosene by Rs 2 a litre and of LPG by Rs 50 per cylinder. Thereafter, it suggested raising rates on a monthly basis till the revenue losses are wiped off.

Moily refused to comment on his ministry's wishlist for the Budget 2013-14 saying taxation matters were a perogrative of Finance Minister P Chidambaram.

He refused to comment on raising supply of subsidised cooking gas cylinders for households to nine a year from the current cap of six saying the moment he utters a word, he would get a notice from the Election Commission.

Model code of conduct is in place as Assembly elections in three states have been declared.

Price of diesel, which currently costs Rs 47.15 per litre in Delhi, was last revised on September 14 when it was hiked by a steep Rs 5.63 per litre. Kerosene rates have not changed since June 2011 and it currently costs Rs 14.79 per litre in Delhi.

Subsidised LPG costs Rs 410.50 per 14.2-kg cylinder and any household requirement beyond current cap of 6 cylinders is to be bought at near market price of Rs 895.50 per bottle.

State-owned oil companies currently sell diesel at a loss of Rs 10.16 per litre, kerosene at Rs 32.17 a litre and LPG at Rs 490.50 per 14.2-kg cylinder.

RBI dashes rate cut hopes, Sensex slips 169 points

he BSE benchmark Sensex Wednesday fell for the first time in three days by slipping 169 points to 19,817.63, dragged down by auto, banking and realty stocks as rate cut hopes were dented by RBI Governor D Subbarao's view that inflation is "still high".

The 30-share Sensex fell by 169.19 points, or 0.85 percent to settle at 19,817.63. Rallying 324 points in previous three sessions, index had crossed 20,000-mark after two years in Tuesday's trade on the back of rate cut hopes, signs of corporate earnings and postponement of GAAR.

The broad-based NSE index Nifty also ended 54.75 points, 0.90 percent, lower at 6,001.85.

"When growth is slowing down you can stimulate the economy either by monetary easing or by fiscal stimulus, but both monetary and fiscal side have no room for stimulus... Inflation has come down, (it is) still high," Subbarao said while addressing students last evening in Lucknow.

RBI will meet on January 29 to review monetary policy.

With rate cut hopes dashed, ICICI Bank and SBI closed around 2 percent lower. Auto majors Tata Motors, M&M and Maruti Suzuki shed around 3 percent each in heavy selling.

Overall, 12 out of 13 sectoral BSE indices closed lower.

"Statement from RBI Governor D Subbarao indicating that inflation is still towards higher range dampened hopes of rate cuts and led to selling pressure in all major sectors," said Nidhi Sarswat, Senior Research Analyst, Bonanza Portfolio.

Among realty stocks, DLF shed 1.5 percent while Sobha Developers, Unitech and Anant Raj lost 3.7-4.5 percent in the BSE Realty index. Metal pack was also under pressure with Hindalco, which lost over 4.3 percent, the worst performer in Sensex. Tata Steel and Jindal Steel also closed lower.

Besides, a weakening trend in the Asian region and lower opening in European markets also triggered selling in Indian stocks. Shares of Infosys, which had been in the limelight in the past few sessions, succumbed to profit booking. However, TCS rose 1.03 percent.

On the global front, Asian markets, excepting Singapore which closed higher, finished with losses up to 2.56 percent.

European shares were also trading weak in their afternoon deals on lower Asian cues. The CAC was down by 0.31 percent, the DAX by 0.30 percent and the FTSE by 0.55 percent.

Back home, 24 of the 30 Sensex-based scrips closed with losses while others finished with gains.

Hindalco was the top loser from Sensex pack with a fall of 4.38 percent, followed by Maruti Suzuki (3.43 percent), Tata Motors (3.24 percent), Jindal Steel (3.11 percent), M&M (2.95 percent), SBI (2.25 percent), Tata Steel (2.16 percent) and Bajaj Auto (2.00 percent). ICICI Bank (1.98 percent), BHEL (1.61 percent), Tata Power (1.58 percent), Sun Pharma (1.35 percent), HDFC Bank (1.20 percent), ONGC (1.08 percent), HUL (1.08 percent) and L&T (1.03 percent) also witnessed losses.

However, RIL rose by 1.72 percent, followed by Dr Reddy's Lab (1.43 percent) and TCS (1.03 percent) among winners.

Among major losers in sectoral indices, the BSE-Auto dipped by 2.40 percent, BSE-Metal by 2.10 percent, BSE Bankex by 1.66 percent, BSE-Realty by 1.37 percent, BSE-CG by 1.17 percent and BSE-PSU by 1.17 percent.

The total market breadth was sharply negative with 2,001 stocks losing ground against 938 finishing with losses. The total turnover was slightly up at Rs 2,462.41 crore from Rs 2,450.40 crore on Tuesday.

Foreign institutional investors (FIIs) bought shares worth a net Rs 1,077.54 crore on Tuesday as per provisional data from the stock exchanges.