RBI Policy Weighs Heavy on Markets

Higher than expected hike in the key lending rates by the RBI took the markets lower today in afternoon trades. The Sensex erased all gains and dropped to a low of 18,482 in the last half hour of trades. The index finally ended at 18,518 - down 353 points. Nifty ended down 105 points at 5,575. Carrying on with its anti-inflationary stance, RBI raised the repo rate by 50 basis points to 8% from 7.5%. Reverse repo has also been raised from 6.5% to 7% while the CRR has been left unchanged. Commenting on the RBI policy Rajrishi Singhal, Head, Policy & Research, Dhanlaxmi Bank said “The Reserve Bank's sledgehammer action of 50 bps is based on the fact that non-food manufactured goods inflation continues to remain above 7% (against the average of 4% in the previous six years) and price pressures in the consumer price indices continue unabated. It is also predicated on the apprehension that inflation is likely to continue at elevated levels if the government continues with its pro-cyclical demand-generation policies, and simultaneously fails to initiate credible policy action to remove some of the supply side infirmities.” However 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. According to Sudip Bandyopadhyay, MD & CEO of Destimoney Securities "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.” On the market front the hike in rates took key interest rate sensitive sectors down. BSE realty index shed 3.5% to close the day at 2,144. Banking and auto were down over 2% each. BSE market breadth was fairly negative with 1,893 stocks declining as against 994 stocks on the advancing side.