RBI shocker stuns Street, Sensex sheds 353 points

A steeper-than-expected hike in the key rates by the RBI took the markets by surprise, as a result of which they took a sharp dip post announcement. The Sensex erased all gains and plunged to a low of 18,482 - down around 450 points from the day's high of 18,944 - in the last half hour of trades. The index finally ended at 18,518 - down 353 points. The Nifty ended down 105 points at 5,575.

Continuing its anti-inflationary stance, Reserve Bank of India (RBI) raised the repo rate by 50 basis points (bps) to 8% from 7.5% and the reverse repo rate was raised from 6.5% to 7%. The Central Bank, however, kept the Cash Reserve Ratio (CRR) unchanged.

Last time, the Central Bank raised rates by 50 basis points was two months back in May 2011. Thereafter, the benchmark indices saw a bigger fall and ended with losses of over 2 per cent each. In fact, the markets went on to extend losses for another two trading days.

"There are signs that growth is beginning to moderate, particularly in interest sensitive sectors. But there is no signs of a broad-based slowdown", said RBI Governor D Subbarao. He added that a moderation in demand is necessary to bring down inflaiton and that the US debt standoff will add risks to the global capital flows.

FY12 GDP growth forecast was kept unchanged at 8%. The RBI stated that the FY12 fiscal deficit target is a challenge and that this move has been taken to control inflation which is imperative to sustain growth.

"This is an aggressive posture taken by RBI considering the inflation scenario. Very clearly shows that RBI is willing to sacrifice growth to tame inflation. Industry will suffer and hope that this will be the last of such  hikes,” Sudip Bandyopadhyay, MD & CEO, Destimoney Securities.

"There is a complete lack of coordination between the fiscal policy & monetary policy action. We have to acknowledge that global commodity prices & supply side issues cannot be addressed with monetary policy action & extremely high interest rates without impacting growth," said Aneesh Srivastava, CIO - IDBI Federal Insurance Company.

The rate hike took key interest rate sentive sectors down. BSE realty index shed 3.5% at 2,144.

Indiabulls Real Estate dropped 5% to Rs 110. DLF and Unitech  slipped 4% each. Other losers included Sobha Developers, HDIL and DB Realty.

Bankex and the auto index were down over 2% each.

ICICI Bank was the biggest dragger among Sensex stocks. The stocks, along with HDFC Bank, was responsible for a nearly 60 points slide on the BSE benchmark. Among banking stocks, Kotak Mahindra Bank, IndusInd Bank, Yes Bank and IDBI bank were also down. Bank of India slipped 3.5% to a new 52-week low of Rs 389 after posting a 28% decline in net profit for the first quarter ended June 30, 2011.

Auto stocks took a beating, ignoring Maruti Suzuki's strong performance in Q1. The country's largest autocar maker posted its net profit for the quarter ended June, 2011 at  Rs 549.23 crore, an increase of Rs 465.36 crore in the corresponding quarter a year ago. Total income increased to Rs 8,709.37 crore from Rs 8,409.62 crore in the same period. The stock was flat at Rs 1,178. However, M&M, Tata Motors and Bajaj Auto slipped 2-4% each.

Meanwhile, weakness in Reliance post-results also played a part in the Sensex's downmove. RIL reported a 16.70% increase in its consolidated net profit at Rs 5,661 crore for the first quarter ended June 30, on the back of higher refining margins. Its net profit for the period April-June last year was Rs 4,851 crore, the company said in a filing.

BHEL slipped 5% to Rs 1,909 owing to negative market sentiments, inspite of having announced encouraging results. The power equipment major reported a nearly 22% jump at Rs 816 crore in net profit for the three months ended June 2011. The rise in net has been attributed to improved sales and efficient cost management efforts.

Tea stocks were up in early trades on news of India's tea imports dipping by almost 18% in April-May this year to 2.31 million kg. CCL Products ended up 10% at Rs 233, after soaring to a high of Rs 241. However, Joonktolle Tea & Industries ended flat after gaining as much as 10% during the day. Tata Global Beverages too shut almost unmoved.

The BSE market breadth was fairly negative with 1,893 stocks declining as against 994 stocks on the advancing side.