Wednesday Washout: Sensex crashes over 1400 pts! Is there more pain ahead? 

Equity benchmarks Sensex and Nifty crashed in the afternoon trade on Wednesday after Reserve Bank of India (RBI) Governor Shaktikanta Das announced a hike in benchmark interest rates by 40 basis points to 4.40 per cent with immediate effect. 

The surprise move comes after the central bank's Monetary Policy Committee (MPC), headed by Das, met on 2-4 May in an "off-cycle" meeting. 

The 30-share BSE benchmark Sensex crashed over 1400 points to hit an intraday low of 55,501 and Nifty tanked over 400 points to 16,623. 

"The repo rate hike and CRR hike announced by the RBI Governor today in an unscheduled call is a negative event for markets. Barely a month ago the same MPC had not only kept the rates unchanged but had also maintained the accommodative stance. This sudden U-turn will now raise worries whether the RBI is suddenly panicking or reacting to the rate hikes by other central banks, especially the Fed," Abhay Agarwal, Founder, and Fund Manager, Piper Serica told Business Today. 

"This rate hike seems to acknowledge that the inflation is more sticky than earlier anticipated. It is a moot point whether increasing the rates will cool off the demand by sucking out liquidity from the system. This point is important since this is a major shift from the earlier assumption that inflation is driven by supply chain issues rather than excessive demand based on speculative access to cheap capital," he said. 

He highlighted that the big worry is that this sudden rate hike may do more damage to the nascent recovery in consumption demand which will in turn have negative ramifications for private sector capex plans. 

"India needs capital to fund its growth. This policy flip-flop will make the capital more expensive and scarcer. While there is hope that the policy stance will revert to normal after the inflation cools off no investor will bet on it in the short term. Short term savers will benefit from the spike in bond yields however the borrowers will need to be ready for higher EMIs. We expect the credit cost for lenders will go up and NIMs will come under pressure leading to continued underperformance by stocks of large banks and NBFCs," he added. 

Sonam Srivastava, Founder at Wright Research noted that the RBI had already hinted at the change in stance towards the calibrated withdrawal of accommodation in the previous regular monetary policy announcement and this increase in repo rate and CRR is in line with the monetary policy still being accommodative, with focus on careful & calibrated withdrawal of accommodation. 

"Many are suggesting that this sudden move came just before the anticipated 50bps FED rate hike, which could have suddenly derailed the credit market in India. The governor cited food inflation and commodity price volatility as the primary reasons for this hike," she added. 

"The MPC's decision, in an unscheduled meeting, to raise the repo rate by 40bp and CRR by 50 basis points is a surprise since it came on the LIC IPO opening date. MPC’s proactive move is justified from the perspective of inflation management, but the timing leaves a lot to be desired," said VK Vijayakumar, chief investment strategist, Geojit Financial Services. 

"The 1,400-point crash in Sensex has soured the sentiments on the opening day of India’s largest IPO. The 10-year bond yield has spiked to above 7.39 per cent indicating an imminent rise in the cost of funds," he added. 

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities said, "The combination of 40 bps hike in repo rate and 50 bps hike in CRR is an attempt by the RBI to preempt the rising inflationary pressures and be ahead of the curve. The bigger surprise was the CRR hike which indicates the RBI's intent on withdrawing liquidity at a sharper pace." 

"While inflation is unlikely to decline in the near term, today's move should help in pushing real rates towards neutral over the next few quarters. Rates across the curve will reprice factoring in a markedly more hawkish RBI. We continue to expect cumulative 100-125 bps of repo rate hikes in FY2023," Rakshit added. 

Ram Kalyan Medury, Founder & CEO, Jama Wealth said, "RBI appears to have triggered a high interest rate cycle by announcing a Repo Rate hike of 40 basis points. This has been done off cycle and almost like an ad hoc decision but also signals a hawkish stand. The key fear is inflation in the backdrop of high oil prices, food prices, power prices and the coal supply situation."

"Long term investors need not panic at the market reaction to this move because nothing has changed with respect to the fundamentals of the economy or of good quality companies. We have seen in the past that companies that manage their costs well manage to tide over periods of high inflation and interest rates," Medury added.

According to Parth Nyati, Founder, Tradingo, RBI Governor today has taken an extremely surprising decision of hiking the repo rate by 40 bps and CRR by 50 bps. This decision has stunned markets as the last meetings’ commentary had mentioned a gradual rate hike and the overall tone was neutral. This sudden hawkish move has been taken against the backdrop of retail inflation persistently staying above the central bank's comfort zone. 

"The market was expecting a rate hike, but the timing is extremely shocking. This will be negative for rate negative 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," he noted.

"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," he added.