Raghuram Rajan's remarks after RBI rate hike cushion markets from fall

Written by fe Bureau | Mumbai | Updated: Jan 29 2014, 14:21pm hrs
The RBI move to hike the repo rate by 25 bps had little impact on interest rate-sensitive stocks, which mostly remain unchanged on Tuesday. The BSE Bankex slid marginally by -0.3%, while the BSE Auto index was up 0.16%. BSE Realty was up 1.08%.

Sobha Developers (-3.13%), Maruti Suzuki (-8.1%), Axis Bank (-3.28%), Canara Bank (-1.7%) and IndusInd Bank (-1.45%) were the top rate-sensitive losers on Tuesday. Nine out of the 13 BSE Realty stocks advanced, while five out of 12 BSE Bankex stocks gained.

The rate hike took the market by surprise on Tuesday and the benchmark BSE Sensex tumbled 217.78 points within a matter of nine minutes of the policy announcement. However, the index recovered on the RBI governors dovish statement ruling out further rate hikes in the immediate future and the Sensex ended the day flat, down just 0.12% at 20,683.5. The 50-share NSE Nifty was down 0.16% to 6,126.

The reason that markets did not fall despite the 25-bps hike was the dovish guidance given by the governor. There is a sense that there wont be any hike between now and April, said Andrew Holland, CEO, Ambit Investment Advisors. According to the RBIs policy statement, an increase in the policy rate would set the economy securely on the recommended disinflationary path. If the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture," it said.

FIIs sold shares worth $202 million on Tuesday, paring their year-to-date purchases to $77 million. However, DIIs bought shares worth $188 million, cushioning the market's fall. Industry watchers believe that a more aggressive cut in quantitative easing looms and this might impact FII flows to emerging markets such as India. The FOMC will continue its two-day policy review meet on January 29.

Elsewhere, Asian indices were little changed on Tuesday. Nikkei 225 and Hang Seng were marginally down. Kospi, Straits Times, Jakarta Composite and the Shanghai Composite were up anywhere between 0.26% and 0.66%. Key European indices, FTSE 100, DAX and CAC were trading up between 0.4% and 0.78% at 6.30 pm IST.

Markets are likely to closely follow the incoming economic data in the coming weeks and developments on the new policy framework. Latest news flow on divestment, spectrum auctions and public sector dividends suggests the government is likely to meet the fiscal deficit targets, despite low tax revenue growth, said Santosh Kamath, CIO, fixed income, Franklin Templeton Investments-India.

The Sensex had slid the most in five months on Monday amid a drop in emerging-market equities and currencies. India VIX, a volatility index based on the CNX Nifty index option prices, slid 5% to 17.72 on Tuesday, indicating declining volatility.