The 40 basis point-rate hike in the repo rate, the first rate hike since August 2018, and cash reserve ratio (CRR) by 50 basis points, sent stocks tumbling. Sensex tumbled 1,307 points for the day while Nifty50 settled below the 16,700 level, breaching the lower end of a range that had gained respect among traders for bounce backs in the past.
NEW DELHI: An RBI rate hike was all likely, especially when the US Fed was all set to increase the pace of rate hikes to 50 basis points later in the day and, by some forecasts, 75 basis points in June. But a surprise off-policy rate hike wasn’t.
The 40 basis point-rate hike in the repo rate, the first rate hike since August 2018, and 50 basis points increase in cash reserve ratio (CRR), sent stocks tumbling. Sensex slumped 1,307 points for the day while Nifty50 settled below the 16,700 level, breaching the lower end of a range that had gained respect among traders for bounce backs in the past.
Analysts said inflation prints were anyway above the RBI’s comfort level and that the April reading could have been even concerning, which might have prompted the central bank to take immediate action to curb inflation. Equity markets investors should brace for some near term weakness, analysts said.
“The March inflation numbers were elevated and while the April print numbers are yet to out, the RBI could be privy to that. The RBI Governor in his address said April inflation continued to show an upward spike and to restore its tattered credibility, the RBI has been compelled to go off-policy rate hike. This was long overdue to anchor inflationary expectations as per the parliament mandate to MPC,” said Independent Analyst Ajay Bodke.
Foreign brokerage Nomura inflation is expecting inflation to come in at 7 per cent in April and average 6.6 per cent YoY in FY23.
With sharp rate hikes expected in the developed markets, continuance of war between Russia and Ukraine impacting global food and fuel prices, rising of Covid cases in China impacting further supply chain disruptions, it was incumbent on RBI to act aggressively, Bodke, said, who expects a spike in risk aversion.
Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares and Stock Brokers said March inflation was nearly 100 basis points higher than expected and another surprise high inflation rate is now expected in April.
The perception that the RBI is falling behind the curve, external sector pressures (capital outflow, higher trade deficit, weaker rupee) and likelihood of 50 bps rate hike by the Fed may have also contributed to the rate hike.
“Today’s rate hike makes the effective rate higher by 80 bps. The simultaneous 50 bps CRR hike would tighten liquidity by Rs 90,000 crore immediately, which would improve the transmission of rate hike in credit and debt market. We expect an immediate increase in money market rate, some transmission in the long-term bond market and also credit market (both lending and deposit rates). The impact on the equity market is likely to be negative in the short-term,” Hajra said.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said the rate hike was a surprise since it came on the day of opening of the LIC IPO.
“MPC’s proactive move is justified from the perspective of inflation management, but the timing leaves a lot to be desired. The above 1,000 point crash in Sensex has soured the sentiments on the opening day of India’s largest IPO. The 10-year bond yield has spiked to above 7.39 per cent, indicating an imminent rise in the cost of funds,” Vijayakumar said.
That said Bodke believes that LIC IPO should easily sail through given the good response from anchor investors and competitive valuations via-a-vis peers.
In the case of banks, the cost of funds is likely to increase, so does the cost of deposits. It may translate into NIMs pressure, said Ajit
NSE 0.34 %, Banking Analyst at LKP Securities.
“However, a quick increase in MCLR may control the NIMs squeeze,” Kabi said.