Indian markets on Tuesday fell 2.4%, the most in over a month, after the Reserve Bank of India raised borrowing cost by more-than-expected 50 basis points and said it would battle stubbornly high inflation even at the cost of slower economic growth. The markets fell for a seventh straight session, its longest losing streak in since November 2008, declining 5.3%.
The bellwether Sensex declined 463.33 points, or 2.44% to 18,534.69, its lowest closing since March 24. Meanwhile, the 50-share Nifty closed at 5,565.25, down 136 points, 2.39%. Only one component (BHEL) on both the indices managed to close in the green.
The market has overreacted to the rate hike,” said Manish Sonthalia, VP Fund Manager, Motilal Oswal AMC. “Valuations have got more comfortable at these levels. We don’t except too much of a downside from current levels.”
The declines were led by banking stocks, which have the highest weightage on the benchmark indices. The banking sector index fell over 3% on fears that hike in interest rates and tighter provisioning norms will dent profitability.
The Street sentiments towards the banking sector stocks got a further dent after the central bank decided to hike the savings bank deposits rate to 4% from 3.5% with immediate effect.
Deven Choksey, MD, KR Choksey Stock Broking felt that the monetary policy measures will have an impact beyond the banking sector. “Banks are definitely going to take a hit of 15%-20% on their earnings following the hike. However the RBI’s policy direction of containing inflation at the cost of growth is going to impact corporate earnings which is extremely negative for the broader market,”.
A Goldman Sachs analysis of the impact of savings rate hike on banks indicate that the impact on margins could range between -0.02 bps to -0.64 bps and profit before tax (PBT) by -0.4% to -36% for the financial year 2012.
“This will have a negative impact on banks with higher proportion of savings account balances in their overall funding, i.e. SBI, PNB and HDFC Bank,” states analyst at Morgan Stanley which has maintained a cautious view on