Dalal Street Bleeds On Monetary Policy

Dalal Street gave a thumbs down to the policy measures announced by the Reserve Bank of India (RBI) on Tuesday that clearly looked at reining in inflation even at the cost of foregoing economic growth. Investors were also taken by surprise as the RBI hiked policy rates by more than the market was expecting. At the close of Tuesday’s session, BSE Sensex was 558 points off at 13,792. Investors were poorer by nearly Rs 1.5 lakh crore with BSE’s market capitalization now at Rs 45.25 lakh crore.
On Tuesday, RBI hiked cash reserve ratio (CRR) by 25 basis points (100 basis points = 1%) to 9% and repo rate by 50 basis points, also to 9%, both at multi-year highs. CRR is the the percent of depositors’ money that banks must keep with the RBI as cash, and repo rate is the short-term rate at which the banks borrow from the RBI. Raising both these lead to higher cost of funds for commercial banks that in turn lead to higher interest rates in the economy.
Before the RBI decision came in during mid-session, market was trading lower with investors divided if the central bank would raise any of the policy rates. With the hike coming in surprisingly higher than expected, sensex suddenly dipped to an intra-day low at 13,727, only to recover marginally in late trades to finally settle 4.1% lower.
Brokers and dealers feel RBI’s stance, although expected to control runaway prices during the election year, could lead to some slow down in the economy. “Clearly inflation control remains the top priority and both CRR and repo-rate hikes seek to curb credit growth and correct the short-term debt yield curve,’’ said Sudip Bandyopadhyay, CEO, Reliance Money. “However the GDP growth would suffer as a consequence of this monetary tightening,’’ Bandyopadhyay added. A release from S&P-Crisil combine however termed the RBI move as a ‘short-term cost’ for ‘medium term benefits’.
Most market players are looking at further downside for the sensex with FIIs and domestic institutions (DFIs) both on the selling side of the market, a rare coincidence in recent times.