Stocks crashed on Wednesday after the Reserve Bank of India (RBI) surprised the markets with a mid-cycle rate hike in a bid to tame soaring inflation. The RBI hiked the repo rate by 40 basis points to 4.40% and the cash reserve ratio by 50 basis points to 4.5%. Although a normalisation of the monetary policy was on the cards, the steep jump in the policy rate hurt the sentiment.
The Sensex dived 1,307 points and ended the session at 55,669.03, 2.29% lower than Monday’s close, as investors offloaded rate-sensitive banking and real estate stocks. The Nifty-50 slipped below the 17,000 mark to close at 16,677.60, down 391.50 points or 2.29%. The market’s fear gauge, India VIX, jumped to 21.88, as investors turned cautious ahead of an expected 50-bps rate hike by the US Federal Reserve.
The markets have been choppy for close to two months with foreign portfolio investors (FPIs) offloading stocks after the outbreak of the war between Russia and Ukraine. On Wednesday, FPIs sold shares worth Rs 3,288.18 crore while domestic institutional investors bought shares worth Rs 1,338 crore, provisional data from the exchanges showed.
With corporate earnings turning out to be tepid, and analysts revising earnings estimates, the sentiment has deteriorated. Strategists have pointed out that India remains one of the most expensive markets in its peer group.
Experts believe the upside for equities remains capped in a rising interest rate scenario, at least in the near term. “The rate hike comes as a major surprise and has rattled both the bond and equity markets. The potential downside for equities has increased, and the upside in the near term is capped,” Naveen Kulkarni, chief investment officer at Axis Securities, observed.
Dhiraj Relli, MD & CEO, HDFC Securities, said the hike of 40 bps was higher than the market expectation of 25 bps at the June policy. “This apart, the increase in CRR by 50 bps will lead to Rs 87,000 crore of liquidity being pulled out of the system. That has hurt interest-rate sensitive stocks, including banks, auto and real estate. The Nifty could remain under pressure for some time, “ he said.
All 15 sectoral gauges compiled by the NSE ended in the red on Wednesday – with the Nifty Metal and Realty falling over 3% and Nifty Bank and Auto declining more than 2% each. “Banking and financial stocks saw meltdown on account of the fear of slowing credit growth, as interest rates rise. However, a favourable credit-to-deposit ratio and liquidity will ensure lending rates to rise gradually, not impacting growth in a hard way,” said Aishvarya Dadheech of Ambit Asset Management.