A rising market will be termed healthy if there are downward corrections in between.The reverse is also true in today's market. An increase in indices in the last fortnight is also seen from this perspective. A rise is seen as an upward correction in a falling market. Hence, it should be healthy too. The Friday's CRR and repo rate hike is seen as a slope that allows the market to fall.In the last four months, the RBI sucked out Rs 45,000 crore from the system by increasing the reserve requirements. The repo rate hike is also steep. A consistent increase in money supply, non-food credit and inflation prompted the RBI to raise the rates. Apart from controlling inflation, the RBI move will also curtail growth in a few vibrant sectors of the economy. With a subsequent fall in GDP growth rate, the corporate earnings guidance may also be lowered for 2007-08."De-rating of earnings in banking, auto, cement and housing sectors is a potential risk for the market," said Kamlesh Kotak, head, equity research, Asian Market Securities. These sectors are heavily dependent on interest rates and were the growth drivers of the economy when the rates were low. With rising interest rates, demand in auto and housing will be certainly affected. A strengthening rupee has affected the future of technology sector, which was otherwise immune from interest rate hikes. It is also affecting the competitiveness of exports. "The government is talking down the prices of cement and steel. The FMCG sector is not doing well, with the fortunes of heavyweights, such as ITC, impacted by high VAT rates, leaving limited room to take a call on the sectors that can move the market," said Kotak.Rate hikes were expected, but the timing has come as a surprise. Goldman Sachs, had said in its report, "With the inflation during the last calendar year between March-end and early-April being low, we may see a high inflation rate during March-end and the first week of April." But, the RBI wanted to show that the inflation would be below 5-5.5 per cent during 2007-08 before announcing the annual monetary policy statement at the end of April and hence the tightening measures, said a banking analyst. The RBI has changed the policy stance from "equal emphasis on price stability along with growth to one of reinforcing price stability with immediate monetary measures".Meanwhile, mutual funds are sitting on cash and shy of investing in equities. Likewise, many portfolio managers, managing the portfolios of high networth individuals (HNIs), are holding onto their funds. They believe the body language of the market is not good.An Edelweiss research report says, "Continued inflow of dollar and appreciating rupee prompted the RBI to raise CRR and further tightening is unlikely for now. The CRR will remain a preferred instrument for future tightening." The report further added, "Barring further tightening, the economy is likely to sustain the growth of 8-8.5 per cent in 2007-08 against nearly 9 per cent for 2006-07."The last couple of months have seen the domestic market following global cues. It will continue to do so. Rising crude oil prices are an important global factor. It had remained soft in the last few months, but geopolitical factors are now in force and are keeping the crude oil price higher. With the local negative factors increasing, any global negative news will further bring down the market to a more logical level.
