The hike in repo rate, which is the rate at which RBI loans to commercial banks, from a record low of 4 per cent to 4.40 per cent is the first since August 2018, as well as the first time the RBI governor-led monetary policy committee (MPC) has held an unscheduled meeting to raise interest rates. Deepak Talwar, a seasoned market analyst and lobbyist studies the matter and gives knowledge on how this move is going to affect the stock market.
Recently, after an unscheduled press briefing, RBI Governor informed about the increased repo rates. RBI raised the key interest rate by 40 basis points to combat persistently high inflation in recent months. “It is done in an attempt to upside risk posed by global factors to India’s inflation trajectory,” informs Deepak Talwar. “This decision was accepted to be made in the next RBI-MPC meeting which was going to take place in the month of June, but the MPC has concentrated on avoiding inflationary expectations from un-anchoring in a more uncertain environment, replete with geopolitical uncertainty, by advancing the rate decision by about one month,” Talwar adds.
The announcement sent equity benchmarks plummeting, with the BSE Sensex dropping more than 1,400 points in intraday trade to settle at 55,669.03. The NSE Nifty, on the other hand, fell 391 points to settle below 16,700.
Heavyweight stocks were under a lot of selling pressure. With a 3-4.5 percent drop, Bajaj Finance, Bajaj Finserv, Titan, IndusInd Bank, HDFC Bank, Dr. Reddy’s Lab, and Maruti Suzuki face the burden. Reliance Industries, the most valuable firm in terms of market capitalisation, also dropped by over 3 per cent. Across all sectors indices, there was a widespread selloff. Stocks in consumer durables, commodities, banking, autos, and pharmaceuticals took the brunt of the losses. On Wednesday, 4th May, BSE’s market capitalisation fell to 2,59,60,852.44 crore, down from 2,65,88,212.16 crore the day before.
Deepak Talwar, a market analyst and lobbyist says, “The 50 bps rise in the CRR is estimated to result in a drain of liquidity amounting to Rs. 870 billion. However, the banking system’s average surplus liquidity will remain high, despite the RBI’s pledge of a gradual withdrawal over a multi-year time period.”
Notably, the repo rate increased to 4.40 per cent from a record low of 4 per cent. Defining repo rate, Deepak Talwar, a seasoned market analyst and lobbyist says, “When commercial banks borrow from the RBI by selling their securities to the central bank, the RBI charges a repo rate. It is essentially the interest charged by the RBI when banks borrow from them, similar to the interest charged by commercial banks on a vehicle or home loan.” Furthermore, he explains, “Interest rates and the stock market have an adverse relationship. When the central bank raises the repo rate, it has an immediate influence on the stock market. This indicates that, as a result of the repo rate hike, corporations are cutting back on expansion spending, resulting in a drop in growth, a negative impact on earnings and future cash flows, and a drop in stock values.”
Nevertheless, the impact of a change in the repo rate is not the same across all sectors. Capital-intensive industries including capital goods, infrastructure, and others, are especially exposed to these shifts due to large capital or debt on their books. While, stocks in sectors such as information technology (IT) and fast-moving consumer goods (FMCG) are typically less affected.
Despite raising policy rates, the RBI opted to maintain an accommodative approach, concentrating on withdrawal of accommodation to ensure that inflation remains within target while supporting growth in the future.