The markets lost their way in the later half of the day in a seemingly belated reaction to the rate hike announced by the Reserve Bank in what was a volatile session of trade. The Sensex surrendered almost 400 points from the day's highs to end below the psychological 19k mark at 18969, weaker by 181 points and the Nifty shut shop shy of the 5700 mark at 5687, down 55 points. The midcap index ended at 7222, weaker by 29 points and the smallcap index ended at 8985, down 31 points. Rate sensitive stocks did a bulk of the damage in wake of the RBI decision to hike the rates for the seventh time since March last year. The rollover of positions in the derivatives segment ahead of the January series expiry on Thursday aggravated the volatility activity.
The BSE benchmark was cruising along in the morning session and in fact touched an intra-day high of 19340 as the banking space flared in a knee-jerk reaction to the rate hike announcement. But banks reversed direction from thereon on the apparent realisation that the banking regulator was behind the curve this time around as far as tackling inflation was concerned and the possibility of a further rate hike down the line, dragging the benchmark indices on a downhill journey. Experts reckon that the RBI may opt for another 25 basis points hike in the March policy meeting, what with inflation remaining unabated. One may recollect that the Sensex had gained 143 points and the Nifty had added 46 points in the previous session.
The RBI increased the repo rate to 6.5% from 6.25% and reverse repo rate to 5.5% from 5.25% earlier under the liquidity adjustment facility (LAF). However, the central bank retained the cash reserve ratio (CRR) at 6% of net demand and time liabilities (NDTL) and the bank rate has been retained at 6%.
On the global front, Asian stocks had a mixed session. The key benchmark indices in Hong Kong, Indonesia, Japan, Singapore and South Korea rose upto 2%; China and Taiwan, however, fell upto a percent each. Earlier, takeovers, share buybacks and dividend prospects had driven the Dow Jones to its highest close since June last year at 11,980, up 108 points, and the Nasdaq gaining 28 points. All eyes are now on the US Federal Reserve, which is likely to leave the interest rates rates unchanged at its two-day policy meeting beginning on Tuesday.
The banking index slid by 2.3% at 12349 to emerge as the top sectoral loser on the BSE. ICICI Bank weakened by 4.2% at Rs 1038, HDFC Bank shed 2.8% at Rs 2087 and SBI shed 0.5% at Rs 2679. The auto space saw the likes of M&M shedding 2.2% at Rs 770, Tata Motors losing 1.9% at Rs 1165 and Bajaj Auto down 0.8% at Rs 1295. And in the realty space, Lanco Infra tumbled by 3.9% at Rs 52, Unitech slipped by 3.1% at Rs 56, HDIL lost 1.9% at Rs 160 and DLF edged lower by 0.6% at Rs 253.
Hindustan Unilever collapsed by 5.4% at Rs 281 to top the losers list on the BSE after its net profit declined 1.78% to Rs 637.51 crore on 12.84% rise in total income to Rs 5204.73 crore in Q3 December 2010 over Q3 December 2009. And index heavyweight Reliance Industries' (RIL) lost 1.2% at Rs 958 after slipping more than a percent in the previous trading session on concerns surrounding a slowdown in gas production at the KG-D6 field.
On the other hand, metal stocks had a field day as LMEX, a gauge of six metals traded on the London Metal Exchange rose 0.43% on Monday. Hindalco jumped 10.5% at Rs 235 and Sterlite is up 0.9% at Rs 180, Tata Steel added another 0.9% to its spectacular performance of the previous day at Rs 655 in wake of the stupendous response to its follow-on public offer and Sterlite added 0.2% at Rs 178.
Dr Shubhada Rao, Executive VP & Chief Economist, YES Bank, told Smart Investor,"We did see an upside risk to 25 basis point (bps) call from the hawkish stance that the RBI has spelled out. In the past, calibrated measures have worked well. The economy demonstrates the ability to absorb smaller hikes without disrupting the growth momentum. Clearly, that would have been one of the compulsions for the RBI to continue with the measures. We believe while the inflation trajectory is unlikely to ease very dramatically, the RBI is expected to continue to adopt the tightening mode for a quarter to come."
Aneesh Srivastava, Chief Investment Officer, IDBI Federal Life Insurance, said the RBI has opted for increasing the rates to control inflation in light of falling manufacturing growth, rising inflation and tight liquidity conditions. Gradual increase in interest rates is perhaps the best approach to manage inflation without disrupting growth in current environment
S P Prabhu, Vice President- Fixed Income Fund Management - IDBI Federal Life Insurance, said the debt market was expecting a 25bps hike in the repo rate and the policy announcements have been in line with market expectations. However, concerns over inflation remain, particularly on the food price front.
The market breadth was marginally positive. Out of 3007 stocks traded on the BSE, there were 1204 advancing stocks as against 1636 declines.
The markets are shut on January 26 on account of Republic Day.
