Stock markets are likely to remain volatile this week as investors come to terms with an unexpected hike in interest rate by the RBI and portfolio churning ahead of the September derivatives contract expiry, according to experts.

The surprise move from the RBI has reversed the bullish tone of the markets as the 25 basis point rise in repo rate caught market participants completely off-guard, brokers said. The RBI raised the short-term policy repo rate to 7.5 per cent from 7.25 per cent, saying inflation had to be lowered to more tolerable levels. The RBI also partially eased its liquidity-tightening steps that were unveiled to defend a weakening rupee.

“This week will see expiry of September month’s F&O contracts (on Thursday) so volatility will tend to remain high. Meanwhile, the markets are likely to consolidate in the broad range of 5,800-6,150 and form a base for next directional move,” said Jayant Manglik, President (Retail Distribution), Religare Securities.

Stock markets would also monitor trend in foreign fund investment and global cues for further direction. Overseas investors have pumped in over $1.7 billion in the Indian stock market so far this month.

The BSE benchmark had lost 383 points on Friday, the most in three weeks, after RBI monetary policy review. The Sensex had surged 684.48 points to an almost 3-year high on Thursday after the US Federal Reserve refrained from easing its stimulus programme. For the entire week, the index gained 2.69 per cent to close at 20,263.71.

“The deferment in withdrawal of quantitative easing by the US has given Indian policy makers a breathing space of three months at the least and six months at the best,” said P H Ravikumar, Managing Director, Capri Global Capital.