Stocks tumbled on Wednesday after the Reserve Bank surprised the market with a mid-cycle rate hike to tame rising inflation.
The move came just ahead of the Federal Reserve’s policy decision, with analysts expecting a similar move by the US Federal Reserve as well as a shift in focus to combat runaway inflation exacerbated by geopolitical tensions.
After a bumpy start, the 30-track BSE Sensex came under heavy selling pressure following the RBI’s rate hike to close 1,306.96 points, or 2.29%, from a two-month low of 55,669.03. This was his third consecutive losing session. Similarly, the broader NSE Nifty lost 391.50 points, or 2.29 percent, to end at 16,677.60.
The market capitalization of all companies listed on the BSE fell by £6.27 billion to £2,59,60,852.44 billion. Bajaj Finance was the biggest loser in the Sensex package, down 4.29%, followed by Bajaj Finserv, Titan, IndusInd Bank, HDFC Bank, Maruti and RIL.
Only three constituents finished higher – PowerGrid, NTPC and Kotak Mahindra Bank, up 2.75%.
In a move that will increase the cost of borrowing for businesses and individuals, the RBI hiked interest rates by 40 basis points (bps) to 4.40% on Wednesday after an unscheduled MPC meeting in a bid to stem inflation that has been stubbornly above the target of 6%. for the last three months.
The Monetary Policy Committee (MPC), headed by RBI Governor Shaktikanta Das, also increased the amount deposit banks are required to hold cash reserves by 50 basis points to 4.5% in a bid to suck 87,000 crore of liquidity out of the banking system.
The CRR increase applies from May 21st.
This is the first rate hike since August 2018 and the first time the MPC has unscheduled hikes in the repo rate (the rate at which banks borrow from the RBI). “The MPC’s decision…is a surprise given that it was made on the opening date of the LIC IPO. MPC’s proactive move is justified from an inflation management perspective, but the timing leaves something to be desired.
“The plunge of over 1,000 points in Sensex has spoiled sentiment on the opening day of India’s largest IPO,” said VK Vijayakumar, chief investment strategist at Geojit Financial Services.
Unmesh Kulkarni, Managing Director Senior Advisor, Julius Baer India, said the MPC’s actions were a result of concerns that the RBI may have underestimated inflation and is lagging behind in changing its monetary policy stance.
“Markets were obviously taken by surprise with the benchmark 10-year g-sec yield rising to 7.40% on the day. With the expanded government borrowing calendar this year, RBI faces a difficult task of meeting the market’s yield expectations while continuing to conduct the weekly auctions without interruption,” he noted.
In the broader market, the BSE midcap gauge plunged 2.63% while the smallcap index fell 2.11%. As many as 2,548 shares fell while 826 rose and 101 remained flat.
Sector-wise, BSE Durables fell the most, down 3.88%, followed by Real Estate (3.31%), Consumer Goods & Services (3.01%), Health Care (2.92%) and Telecom (2.73%).
World markets were in wait and watch mode prior to the Fed’s monetary policy decision. Markets in Seoul and Hong Kong closed lower, while Shanghai and Hong Kong were closed for public holidays. Stock markets in Europe also traded lower in the afternoon session. Trading on the US stock exchanges rose sharply on Tuesday.
Meanwhile, international oil benchmark Brent crude rose 3.12 percent to $108.3 a barrel. The rupee rose 8 paise to trade at 76.40 (prelim) against the US dollar on Wednesday.
Foreign institutional investors sold a net £1,853.46 billion worth of shares on Monday, according to stock market data.
