The markets have reacted positively to the monetary policy measures announced by the central bank at its quarterly policy review meet held this afternoon. The Sensex ended at 18077, higher by 57 points, and the Nifty ended at 5430, up 12 points. The midcap index ended higher by 20 points at Rs 7381, while the smallcap index ended virtually unchanged at 9360. And the rate sensitive sector led the way, with the BSE Auto index strengthening by 2.4%, realty gaining 1.4% and bankex adding 0.6%.
The Reserve Bank of India hiked the repo rate by 25 basis points to 5.75% and the reverse repo rate by 50 basis points to 4.5%, while keeping the cash reserve ratio (CRR) unchanged at 6%.
With inflation stubbornly holding on to the 10% mark for the past five months, the rate hike seems to be an attempt at striking a balance between inflation and growth expectations. And going by the reaction of the markets, especially the rate-sensitives, the hike in the interest rates seem to have already been priced in.
The RBI also revised the GDP forecast from 8% to 8.5% for the year ended March 2011, taking into account the progress of monsoons and the prevailing macroeconomic scenario on the global front.
Auto played a dominant role on the bourses. M&M took the lead by registering gains of 3.2% at Rs 639. Tata Motors was a close second, jumping 3.1% at Rs 844. Here Honda strengthened by 2.9% at Rs 1865 and Maruti gained 1.4% at Rs 1207. In the realty space, DLF gained 2% at Rs 319 and HDIL added 2.5% at Rs 262. The banking space saw SBI adding 1% at Rs 2435, ICICI Bank adding 0.9% at Rs 924 and HDFC Bank adding 0.6% at Rs 2065.
Among the losers, L&T weakened by 2.9% at Rs 1863, HDFC shed 0.6% at Rs 2940 and BHEL lost 0.5% at Rs 2448.
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Hindustan Unilever edged lower by 0.4% at Rs 260 after reporting a dip in net profits in the June quarter and index heavyweight RIL ended flat at Rs 1053 ahead of its results scheduled in the later part of the day.
The market breadth was mildly negative. Out of 3000 stocks traded on the BSE, there were 1369 advancing stocks as against 1520 declines.
Jayesh Mehta, Managing Director and Country Treasurer, Bank of America, told Smart Investor, "Markets and bond markets had already priced in the rate hike. Reverse repo rate hike of 50 bps will be immaterial at this juncture. However RBI is trying to narrow the gap between between repo rate and reverse repo to reduce the interest rate volatility. Markets will continue to trade in the negative zone."
"As the economy has made an U turn and is in the middle of a growing curve, rate sensitive sectors react positively--this is what happened between 2004 and 2005. Confidence has built up among the market men and thus the realty, auto and banking pack has seen a surge post the rate hike. Markets look fairly valued, expect some consolidation before markets make fresh highs. Expect 400-500 points upmove in the short term if global cues remain strong", Kartik Mehta, AVP Research, Sushil Finance, told Smart Investor.