RBI announcement saw the markets tumble, with the S&P BSE Sensex slipping over 1,100 points in intraday deals to around 55,800 levels.
The Reserve Bank of India (RBI) announcing on Wednesday an out-of-policy hike in repo rate by 40 basis points (bps) to 4.4 per cent with immediate effect and a 50 bps hike in the cash reserve ratio (CRR) to 4.5 per cent took the markets by surprise, said analysts, who expected the central bank to hike rates only in June.
“The hike in rates, though was expected, was only likely to come through in the June policy review. The quantum of hike (40 bps) in this out-of-turn announcement was also a surprise as the markets expected the RBI to hike by 25 bps. Going ahead, the indexes will take cues from what the US Fed and the other global central banks do to tame inflation,” said Vaibhav Sanghavi, co-CEO, Avendus Capital Public Markets Alternate Strategies.
The development saw the markets tumble, with the S&P BSE Sensex slipping over 1,400 points in intraday deals to around 55,600 levels. On the other hand, the Nifty50, too, shed over 1.5 per cent, or 260 points in intra-day trade and tested the 16,800 mark.
“India is at the cusp of a policy normalisation cycle. Elevated CPI inflation in FY23 will likely mean a delayed policy catch-up. We expect 200 bps in cumulative repo rate hikes by the third quarter of 2023 (Q3-2023), starting with a 25 bps hike in June, which will take the terminal repo rate to 6% by Q3-2023,” wrote Sonal Varma, chief economist for India and Asia ex-Japan at Nomura in a recent co-authored note with Aurodeep Nandi.
In the last policy meeting in April, the monetary policy committee (MPC) of the RBI had shifted its focus to tackle the rising inflation in India after the Russian invasion of Ukraine led to a surge in commodity prices, especially that of crude oil, which zoomed to over $140 a barrel–a 14-year high.
“This is a mid-cycle hike and that has surprised the market. Even if there was to be a hike, the markets were expecting a 25 bps rise in repo rate. On the whole, it was a surprise package, which was done out-of-turn. That said, the markets will accept this and come to terms with the development,” said U R Bhat, co-founder and director, Alphaniti Fintech.
Despite the knee-jerk reaction, analysts see the stock markets take cues from the policies of other central banks, especially the US Fed and its measures to tame rising inflation that hit a 41-year high of 8.5 per cent in March 2022. As regards the Indian indices, they do not expect too much downside from the current levels, though caution against volatility in the backdrop of global and domestic developments.
“I do not see much downside in the S&P BSE Sensex and the Nifty50 from here on. The markets will eventually realize that the economy is getting better – as seen from the latest goods and service tax (GST) collections and recover. The Nifty50 index can dip to 16,500 – 16,600 and then recover. For traders and short-term investors, it is not a bad idea to start nibbling in the markets,” Bhat said.