Markets sink post monetary policy; Bankex end down 8.3 per cent

29 July 2008

More than expected hike in repo rate and CRR by RBI has smashed out markets very badly. Rate sensitives like banking, realty and auto, and infrastructure sectors like capital goods and power took huge beating on the bourses. Sell off in global markets on the back of renewed credit concerns in US financial space was another reason for free fall in markets.

Broader indices - Sensex and Nifty again breached 14000 and 4200 levels, respectively. Sensex 30 closed at 13,791.54, down 557.57 points or 3.89%, after hitting an intraday low of 13,727.14 (down 621.97 points from previous close). Nifty touched low of 4159.15, down 172.95 points from previous close. It ended with a loss of 142.25 points at 4,189.85.

RBI has announced monetary policy today, wherein it raised repo rate (rate at which banks borrow money from RBI) by 50 bps and CRR (funds which banks have to keep with RBI) by 25 bps to 9% each to control inflation. CRR will be effective from August 30. Hike in repo rate to 9% is for the first time since October 2000 and CRR at 9% for the first time since November 1999.

RBI says bringing down inflation is highest priority. It aims to bring down inflation to 5% as soon as possible. Central bank expects inflation fall sharply from Q4FY09. Inflation has emerged biggest risk to global outlook, says RBI.

This hike was more than analysts expectations, they were expecting 25 bps hike in repo rate and that is why markets slaughterd in todays session. Now another interest rate hike from banks is imminent, say banks. Analysts expect some slowdown in GDP growth, and another hike in repo rate and CRR is not ruled out.

Public sector bank, Bank of India says RBI action is more than expected as inflation trend moderating. Banks will definitely look at revising interest rates. BOI expects minimum 50 bps hike in PLR.