RBI's unexpected repo rate hike surprises markets

Indian equities came down crashing on the bourses yesterday, as the Reserve Bank of India announced a surprise rate hike.
In an unscheduled policy announcement, RBI governor Shaktikanta Das pronounced the repo rate increase by 40 basis points to 4.4%, a first since August 2018. Besides, Das also increased CRR -- or Cash Reserve Ratio -- by 50 bps to 4.5% in a bid to suck liquidity out of the system.
 
Today’s rate hike, along with April policy’s decision on the Standing Deposit Facility, makes the effective rate higher by 80 bps. Thus, along with the simultaneous CRR hike, it would withdraw liquidity worth Rs 90,000 crore from May 21.

The move, however, sent equities into a tailspin as investors had priced in a repo rate revision only by June policy. The S&P BSE Sensex tumbled 1,306 points to close at 55,669, while the Nifty50 dropped 429 points to 16,40 levels. The Nifty Bank index, meanwhile, fell 2.5% to end at 35,264 .
 
In the money market, 10-year government bond yields jumped nearly 4% to 7.3%.
 
U R Bhat, Co-founder and Director, Alphaniti Fintech, says Mid-cycle hike has surprised the market. Markets were expecting a 25 bps rise in repo rate and markets will accept this and come to terms with the development. 

Analysts feel rate-sensitive sectors like banking, NBFCs, automobiles and real estate may remain choppy in the near-term as the sudden increase in interest rates signals an imminent end to the all-time low interest regime, which has been one of the major drivers for credit revival across segments.

Going ahead, it could be a bumpy road for the markets as they have broken their immediate support levels on tech charts.
 
Thursday’s trading action, too, will be clouded by investors’ assessment of the RBI policy action and the weekly F&O expiry. That apart, the US Federal Reserve’s interest rate decision, too, will guide the indices today.

Moreover, LIC’s Rs 21,000-crore IPO may also deviate participation away the secondary market. At the end of day-one, the mega public offer was subscribed over 60 per cent driven by policyholders and employees.
Their portions were subscribed nearly two times and 100 per cent, respectively. Retail investors’ quota, meanwhile, was subscribed a little over 50%.