Sensex sheds 176 pts ahead of RBI policy; banks drag

Indian equity benchmarks fell 1% on Wednesday ahead of RBI policy tomorrow, indicating that there could be hawkish statement by D Subbarao, governor as inflation has not showing any signs of moving downward. Experts as well as bankers feel that there would be at least 25 basis points hike in repo rate and another 25 basis points in next meet.

Though there was a sell-off in the market today ahead of policy but overall the market has been moving in a range of 5400-5600 since previous month. The 50-share NSE Nifty fell 53 points, to close at 5,447.50 and the 30-share BSE Sensex shed 176.42 points, to end at 18,132.24.

Inflation, announced yesterday, for the month of May was 9.06% - much higher as compared to 8.66% in previous month. Even March WPI inflation rate revised upward to 9.68% as against 9.02% (on provisional basis). It is a clear signal for RBI that it would continue its rate hike to tame such a high inflation while keeping in mind the growth as well.

Moses Harding, Head Global Markets Group at IndusInd Bank said RBI has now an unenviable task on hand to bring WPI inflation back into 8.5% without allowing slippage in GDP growth below 7.5%. "GDP growth below 7.5% and WPI inflation above 9% is not good for the Indian economy and its stake holders. This scenario would kill the investment appetite both from domestic and off-shore investors," Harding said.

According to him, there are two options for RBI now. "One, deliver the expectation of 25bps rate hike and maintain a balanced tone highlighting the fact that hike beyond this point will hurt growth. The need for the Government is also to signal delay in roll out of price hike in petroleum products. The other option is to take a no change stance but stay hawkish with preparedness for actions in July monetary policy if inflation continues to stay above 9% and crude oil moves back above USD 100 a barrel."

Hemant Thukral, Head, Derivatives Research at SBI Capital Securities feels that tomorrow's policy will be playing a crucial role. "It seems that lot of things are factored in but lot of heavyweights that includes Reliance they are giving up very crucial support levels, so that is causing a slight jitter among the traders. I have a feeling that the moment we go below 5400 the way the puts have been written you will see a further cut of 100-150 points. So I think next 50 points or tomorrow's policy is very crucial for Nifty," Thukral said.