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.
RBI monetary policy | repo rate | BSE
Puneet Wadhwa |
Last Updated at May 5, 2022 02:35 IST
The out-of-turn 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 to 4.5 per cent by the Reserve Bank of India (RBI) on Wednesday took the markets by surprise, said analysts, who expected the central bank to hike rates only in June.
“The hike in rates, although 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. The indices will take their cue from what the US Federal Reserve (Fed) and other global central banks do to tame inflation,” said Vaibhav Sanghavi, co-chief executive officer, Avendus Capital Public Markets Alternate Strategies.
The development saw the markets tumble, with the S&P BSE Sensex slipping over 1,100 points in intraday deals to around 55,800-levels. Alternatively, the Nifty50, too, shed over 1.5 per cent, or 260 points in intra-day trade, and tested the 16,800-mark.
“India is on the cusp of a policy-normalisation cycle. Elevated Consumer Price Index inflation in 2022-23 (FY23) will likely mean a delayed policy catch-up. We expect 200 bps in cumulative repo rate hikes by the third quarter (Q3) of FY23, starting with a 25-bps hike in June, which will take the terminal repo rate to 6 per cent by Q3FY2023,” wrote Sonal Varma, chief economist (India and Asia ex-Japan), Nomura, in a recent co-authored note with Aurodeep Nandi.
In the last policy meeting in April, the monetary policy committee of the RBI had shifted its focus to tackle rising inflation in India after the Russian invasion of Ukraine led to a surge in commodity prices, especially of crude oil, which zoomed to over $140 a barrel — a 14-year high.
“This is a mid-cycle hike and 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 a knee-jerk reaction, analysts see the stock markets take their cue from the policies of other central banks, especially the Fed and its measures to rein in rising inflation that hit a 41-year high of 8.5 per cent in March. As for Indian indices, they do not expect too much of a downside from the current levels, but caution against volatility in the backdrop of global and domestic developments.
“I do not see a downside in the S&P BSE Sensex and the Nifty50 from here. The markets will eventually realise that the economy is getting better – as seen from the latest goods and service tax 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,” added Bhat.
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