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Rate Hike By RBI spooks market and industry

MP Rana, Wednesday 27th July 2011


Amidst the shocking hike in repo and reverse repo rates by 50 points in the current policy review by RBI, the stock market, on Tuesday, saw a sharp downfall of stock indices and the day ended on a drastic low. The industry experts were earlier predicting a hike of 25 basis points in this review but the actual hike turned out to be double the prior expectations. This leap in the rates comes as the eleventh successive hike in the past 15 months under the RBI’s aggressive drive to curb inflation, which has continuously shown the signs of stubbornness towards all the past upward revisions.


Bombay Stock Exchange’s Sensex fell by 353.07 points, to a low of 18,518.22 points, down by 1.87%. Similarly, Nifty ended at 5574.85 points, which is a downfall of 105.45 points or 1.86% in the intra-day trading session. The sectoral indices were also effected by the current upside revision where, BSE Realty Index, BSE Capital Goods, BSE Bankex and BSE Auto Index fell by 3.55, 3.49, 2.46 and 2.14 percent respectively. As per the estimates by analysts, the successive rate hikes would continue until the Central Bank doesn’t see a desired fall in inflation rate, which may mean a further 50 bps increase in the base rates by end of this year. The rate charged by Central Bank on short term borrowings by commercial banks, also known as repurchase rate has been put at 8% from 7.5% earlier and reverse repurchase rate stood at 7%, an increase of 0.5%.


The director of CII (Confederation of Indian Industry), Chandrajit Banerjee claimed that the current policy review, in the midst of a prevailing slowdown in industrial sector, could result in a spiral of negative growth, and controlling it could become a backbreaking task.

 
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