Why Sensex Dropped 1,306 Points And Nifty Settled Below 17,000 On RBI Surprises 

The Indian equity benchmarks fell sharply lower on Wednesday after the Reserve Bank of India surprised with the market participants with double whammy of interest rate hike to tame inflation and a spike in cash reserve ratio (CRR) to suck out excess liquidity from the banking system. The Sensex fell as much as 1,474 points and Nifty 50 index dropped way below its important psychological level of 17,000.

The Sensex plunged 1,307 points or 2.3 per cent to close at 55,669 and Nifty 50 index dropped 391 points or 2.3 per cent to settle at 16,677.

RBI Interest Rate Hike Surprise

The RBI's Monetary Policy Committee in an off cycle meet on May 2 and 4 decided to increase key lending rate - repo rate by 40 basis points to 4.4 per cent to tame inflation which has been above the RBI's tolerance level of 6 per cent for last three months till March and is also expected to remain at elevated level in April, RBI said. Meanwhile, the MPC decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

"Since the MPC’s meeting in April 2022, disruptions, shortages and escalating prices induced by the geopolitical tensions and sanctions have persisted and downside risks have increased. The International Monetary Fund (IMF) has revised down its forecast of global output growth for 2022 by 0.8 percentage point to 3.6 per cent, in a span of less than three months. The World Trade Organization has scaled down projection of world trade growth for 2022 by 1.7 percentage points to 3.0 per cent," RBI said in Monetary Policy statement.

"As the war draws on and sanctions and retaliatory actions intensify, shortages, volatility in commodity and financial markets, supply dislocations and, most alarmingly, persistent and spreading inflationary pressures are becoming more acute with every passing day. Debt distress is rising in the developing world amidst capital outflows and currency depreciations. Recent GDP releases suggest that the global economic recovery is losing pace," RBI Governor Shaktikanta Das said.

Sucking Excess Liquidity

The RBI also surprised the market participants by sucking out excess liquidity from the banking system by increasing the Cash Reserve Ratio (CRR) by 50 basis points to 4.5 per cent. CRR is the bank's total deposits that have to be maintained with the RBI. 

"In keeping with the stance of withdrawal of accommodation and in line with the earlier announcement of gradual withdrawal of liquidity over a multi-year time frame, it has been decided to increase the cash reserve ratio (CRR) by 50 basis points to 4.5 per cent of net demand and time liabilities (NDTL), effective from the fortnight beginning May 21, 2022. The withdrawal of liquidity through this increase in the CRR would be of the order of Rs 87,000 crore," Governor Das said.

On Dalal Street, selling pressure was visible across sectors as all the 15 sector gauges compiled by the National Stock Exchange ended lower led by the Nifty Media index's over 4 per cent decline. Nifty Metal, Bank, Pharma, Healthcare, PSU Bank, Realty, Consumer Durables, Financial Services and Auto indices also fell between 2.5-4 per cent.

Mid- and small-cap shares also faced selling pressure as Nifty Midcap 100 and Nifty Smallcap 100 indices dropped over 2 per cent each.

On the primary market front, LIC shares were witnessing good response in the ongoing IPO which began today. The LIC IPO was subscribed 59 per cent by 4:00 pm. The portion reserved for policyholders was subscribed 1.77 times while portion set aside for employees was subscribed 96 per cent, data from BSE showed.

Apollo Hospitals was top Nifty loser, the stock fell 6.6 per cent to close at Rs 4,021. Adani Ports, Hindalco, Titan, Bajaj Finance, Bajaj Finserv, Shree Cements, Divi's Labs, Bajaj Auto, IndusInd Bank and HDFC Bank also fell between 3.2-5.2 per cent.

On the flipside, ONGC, Britannia Industries, Power Grid, NTPC, Kotak Mahindra Bank and Coal India were among the notable gainers.

The overall market breadth was extremely negative as 2,548 shares ended lower while 826 closed higher on the BSE.