Indian indices fell over 2 percent on Wednesday after the Reserve Bank of India (RBI) Governor Shaktikanta Das raised repo rate by 40 bps to 4.40 percent from 4 percent earlier amidst rising inflation. The Monetary Policy Committee (MPC) unanimously voted in an unscheduled meeting to raise the repo rate while keeping the stance accommodative.
The MPC has also hiked the cash reserve ratio (CRR) by 50 bps to 4.5 percent. This will be effective from the fortnight beginning May 21. The withdrawal of liquidity due to this increase would be to the order of ₹87,000 crore, RBI Governor Das said in his policy statement.
The Sensex ended 1,310 points lower at 55,669 while the Nifty lost 391 points to settle at 16,677. Broader markets also fell in line with benchmarks, with the midcap and smallcap indices down over 2 percent each.
The 10-year bond yield also rose nine basis points to 7.22 percent as traders feared the central bank governor would announce a rate action.
"The MPC's decision, in an unscheduled meeting, to raise the repo rate by 40bp and CRR by 50 bp is a surprise since it came on the LIC IPO opening date. MPC's proactive move is justified from the perspective of inflation management, but the timing leaves a lot to be desired," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.
Das, in his statement, said that inflation must be tamed to keep the economy resolute. "The biggest contribution to overall macroeconomic and financial stability, as well as sustainable growth, will come from our effort to maintain price stability," he added.
Sharp rise in March inflation print was propelled in particular by food inflation, the RBI Governor noted in his speech.
In April's policy statement, RBI raised the inflation forecast for FY21 to 5.7 percent from 4.5 percent earlier and also said that it would prioritise inflation overgrowth after a gap of three years.
The Consumer Price Index inflation is above the central bank’s comfort band of 2-6 percent. The most recent reading, released on April 12, showed headline retail inflation had surged to a 17-month high of 6.95 percent in March.
With global crude oil prices surging following the Russia-Ukraine crisis, the inflation has significantly increased as India heavily imports the fuel.
Further, global financial conditions have also tightened as the US Federal Reserve has also signalled an aggressive plan to raise interest rates to control inflation in the US.
Over the last few months, several analysts have said that the RBI may be behind the curve when it comes to normalising ultra-loose policies adopted to support growth during the pandemic.
Stocks and Sectors
All sectors were also contributing to the weak sentiment. The Nifty Media index fell the most, down over 4 percent followed by the Realty and Metal indices, down over 3 percent each. Meanwhile, Nifty Bank, Nifty Fin services, Nifty Auto, and Nifty Pharma lost around 2.5 percent each.
Heavyweights RIL, HDFC Bank, ICICI Bank, Bajaj Finance and HDFC contributed the most to the losses.
On Nifty, Adani Ports, Bajaj Finserv, Hindalco, Titan and Bajaj Finance were the top losers, down between 4-5.5 percent while Britannia, ONGC, PowerGrid, NTPC and Kotak Bank led the gains.