Why Stock Markets Gave Up Gains After RBI Increased Repo Rate

The Indian equity benchmarks gave up intraday gains to end lower for fourth straight session on Wednesday after the Reserve Bank of India hiked repo rate by 50 basis points to control inflation which has been above its tolerance level of 6 per cent for quite some time now. The markets initially welcomed the central bank's move to increase rates by 50 basis points but gave up gains in last hour of trade. The Sensex fell as much as 741 points from the day's highest level and Nifty 50 index briefly fell below 16,300 after hitting an intraday high of 16,514.

The Sensex fell 215 points to close at 54,892 and Nifty 50 index declined 60 points to settle at 16,356.

Why The Sharp Fall

The sharp fall in benchmarks came on concerns that RBI will go ahead with aggressive rate hikes to control inflation after the RBI Governor in his statement said that the MPC noted that inflation is likely to remain above the upper tolerance band of 6 per cent through the first three quarters of 2022-23. Meanwhile, the central bank also hiked its inflation expectation to 6.7 per cent for the current financial year from its earlier estimate of 5.7 per cent, analysts said.

"While RBI’s stance has not changed to neutral, the subtle shift from the words “remaining accommodative” to “withdrawal of accommodation” is an important take-away. The MPC also increased its CPI estimates to 6.7 per cent from 5.7 per cent for FY23, which now appears to be a more realistic level. This contributes to enhanced creditability and confidence in RBI’s policy decisions. The status quo on CRR certainly comes as a positive surprise for the banking sector and augurs well to nurture the credit growth revival. Overall, as the repo rate still has catching up to do when compared to global peers, this policy seems to be in the right direction to achieve Governor’s aim to bring back the policy rates to at-least pre-Covid levels," said Yesha Shah, head of equity research, Samco Securities.

Describing the monetary policy announcement as aggressive and moves beyond just frontloading interest rate increases, HDFC Bank chief economist Abheek Barua said the central bank seems far more concerned about inflation now, which is well reflected in its upward revision in its inflation forecast by 100 bps to 6.7 per cent while remaining relatively more sanguine on growth impulses.

The RBI-Monetary Policy Committee is concerned about the broad-based nature of the rise in inflation and the risk of the second-round impact on inflation expectations. Therefore, the policy rate is likely to be raised well beyond the pre-pandemic level, close to 6 per cent by fiscal year-end, Barua said.

In order to control inflation, the economic growth will be compromised and with the rate hike cost of funds will increase and lead tight liquidity conditions in market which does not augur well for bullish momentum for equity markets, Karan Harsh, an independent market analyst told Outlook Business.

Top Movers and Shakers

Seven of 15 sector gauges compiled by the National Stock Exchange ended lower led by the Nifty Oil & Gas index's nearly 1 per cent decline. Rate-sensitive Nifty Bank index gave up intraday gains and fell over 500 points from the day's highest level. Nifty Private Bank, FMCG and Consumer Durable indexes also closed lower.

On the other hand, Nifty Realty, IT and Media shares witnessed buying interest.

Broader markets also faced selling pressure as Nifty Midcap 100 index fell 0.5 per cent and Nifty Smallcap 100 index declined 0.3 per cent.

Bharti Airtel was top Nifty loser, the stock fell 3 per cent to close at Rs 665. ITC, Reliance Industries, UPL, Asian Paints, Shree Cements, HDFC Life, IndusInd Bank, Axis Bank, ICICI Bank, Adani Ports and Bajaj Auto also fell between 1-2 per cent.

On the flipside, Tata Steel, State Bank of India, Titan, Dr Reddy's Labs, Bharat Petroleum, ONGC, Bajaj Finance and Maruti Suzuki were among the gainers.

The overall market breadth was negative as 1,768 shares lower while 1,554 closed higher on the BSE.