The Indian equity markets have fallen over two per cent in the last two trading sessions after a surprise interest hike along with spike in cash reserve ratio (CRR) by the Reserve Bank of India has rattled investors' sentiment in only two sessions. The RBI hiked key lending rate - repo rate - by 40 basis points to 4.4 per cent from record low of 4 per cent to counter inflation which was above its tolerance level of 6 per cent from the last three months.
The shock came in form of CRR hike which is likely to affect abundant liquidity, analysts said and was not expected by the market participants. The central bank hiked the CRR by 50 basis points to 4.5 per cent to suck the excess liquidity in the banking system. RBI Governor said that the withdrawal of liquidity through this increase in the CRR would be of the order of Rs 87,000 crore.
Since the pandemic began, investors got used to easy liquidity conditions which helped markets rally to record high but with ongoing war in Ukraine and resultant inflation globally led to correction in the markets. Moreover, fears of inflationary pressures eating into the profit margins of the companies also came true.
Meanwhile, relentless selling of Indian equities by foreign institutional investors (FIIs) is also adding to the downward pressure for equities. FIIs have so far this year sold shares worth Rs 1,32,019 crore, data from the National Securities Depository Limited (NSDL) showed.
"The market was expecting a rate hike, but the timing is extremely shocking. This will be negative for rate sensitive sectors like banking, NBFCs, automobiles, real estate, etc in the short term. The current inflation is due to supply-side pressures not from the demand side, and many businesses haven’t reached the pre-covid levels, hence the market was expecting a rate hike in the next meeting. Nevertheless, the interest rates are still near all-time lows, this conservative move will give RBI an upper hand in fighting inflation, this decision also removes the overhang from the financial markets, so we are still positive on the market from a medium to long term perspective," said Parth Nyati, founder of online stock trading platform Tradingo.
"The correction will give an opportunity to long term investors to enter the market at lower levels," said AK Prabhakar, head of research at IDBI Capital.
"With one of the major global event (Fed rate hike) now behind – markets should see some stability over the next few weeks. Despite the ongoing Russia-Ukraine war, tightening liquidity and supply chain disruptions, market has been trading in a broader range. Going ahead, domestic equities would continue to track global developments apart from the ongoing earning season for further cues," brokerage firm Motilal Oswal said.