New Delhi, May 4 (IANS): Indian equity benchmarks on Wednesday plunged sharply and settled in the red after the Reserve Bank of India (RBI) announced a hike in repo rate.

In a surprise and unscheduled move, the central bank raised the repo rate by 40 basis points (bps) to 4.40 per cent.

The US Federal Reserve is also expected to raise rates at its ongoing policy meet to fight the prevailing higher inflation.

Following the RBI announcement, the Sensex declined 1,307 points, or 2.29 per cent, and settled at 55,669 points, whereas Nifty fell 392 points, or 2.29 per cent, to 16,678 points.

All the sectoral indices too declined in the intra-day trade.

"Several central banks has already started policy tightening to curb the inflation. Today the rate hike move of 40 bps by RBI has been aimed at containing inflation spikes & re-anchoring inflation expectations. However, RBI has ensured that there will be adequate liquidity in the system to meet the productive requirements of the economy," said Ravi Singh, Vice President and Head of Research at ShareIndia.

The Russia-Ukraine war has led to steep rise in commodities prices which further results in soared retail inflation worldwide.

While inflation is unlikely to decline in the near term, the policy rate hike move would help in pushing real rates towards neutral over the next few quarters, said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.

"Rates across the curve will reprice factoring in a markedly more hawkish RBI. We continue to expect cumulative 100-125 bps of repo rate hikes in FY2023."