Has RBI repo rate hike grounded high-flying Sensex, Nifty?

Are the big bulls of Dalal Street living in denial? A day after inflation-spooked RBI went for the second straight interest rate hike, markets are showing signs of worry. While never-ending global concerns and effects of an anticipated global currency war are the favourite whipping boys these days whenever Indian stocks fall, the bellwether Sensex on Thursday falling 356 points has a local angle too, though few would admit it on-record. Truth be told, the central bank’s monetary policy actions have kind of punctured the shallow rate-hike regime theory propagated by the pundits of the stock market when the first rate-hike happened in June.

With a national election less than a year away, the economic cost of fighting politically-sensitive inflation may come by sacrificing a little bit of growth —- this is the prism in which some participants are beginning to see the second successive hike, spoiling their usually effervescent mood.

The difference in the market’s reaction to the same quantum of rate hike shows its distress. On June 6 when the RBI surprisingly hiked the interest rate by 25 basis points to 6.25%, bold markets surged with Sensex closing 276 points up to end above the 35000 mark.

A day later on June 7, the index went up by a further 284 points, shrugging off any concern about growth. But the same market on August 1 slipped 85 points even though commentators said the second rate hike was on “expected lines”. On August 2, the decline was larger as the Sensex fell by nearly 1% or 356.46 points to 37165.16.

Tasked with the unenviable job of running a tight ship, RBI governor Urjit Patel has his hands full: inflation with lurking uncertainty about oil prices, possibility of a global trade war and fiscal slippage worries.

Watch this Zee Business video here:

“Price-rise ahead of a Lok Sabha election is a political hot potato the United Opposition will make chips from. We understand RBI’s compulsions. But lower rates are critical for Indian economic recovery. If rates are hiked again, we will have to adjust expectations,” said a portfolio manager, who manages long-term term money of foreign investors.     

A sustained rise in interest rates is bad for corporates.

Source: DNA Money