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Our Bureau

Mumbai, June 25 It seems that the Reserve Bank of India’s rate hike was already discounted by the markets on Wednesday as they were in for a breather and ended on a positive note.

The RBI on Tuesday hiked both the repo rate and the cash reserve ratio (CRR) by 50 basis points each. The repo rate has been hiked with immediate effect, while the CRR would be hiked in two tranches — on July 5 and July 19.

The repo rate is the rate at which the RBI lends money to banks, while CRR is parked with the RBI by banks for statutory requirement. Some analysts and marketmen welcome the move, as this might provide some respite from the rising inflation.

“We do not think the rate hike will have a large negative impact on growth,” Mr Tushar Poddar, Vice-President Asia Economic Research, said but cautioned there were “downside risks to our GDP growth forecast of 7.8 per cent” for the current year.

“The action was not unexpected, but the magnitude took the market by surprise,” said Mr Paras Adenwala, Chief Investment Officer, ING investment Management.

“Some kind of monetary tightening was expected and though it was much harsher, the markets have taken it in their stride, as they ended on a positive note,” said Mr Gaurav Dua, Head of Research, Sharekhan Securities Ltd. The benchmark index Sensex was up by 0.80 per cent and closed at 14220.07, while the broader Nifty was up by 1.47 per cent and closed at 4252.65.

“The market has been negative ever since inflation started trending higher, though the RBI has refrained from drastic policy measures till recently, when inflation crossed 11 per cent levels,” said Mr Arjun Parthasarathy, Senior Fund Manager-Fixed Income, IDFC Mutual Fund.

“The tight liquidity will force the market to access the RBI window for funds at 8.5 per cent, thereby putting pressure on yields at the short end of the curve, said Mr Parthasarathy.

“The further tightening of liquidity will hopefully contain inflation to a large extent; but, this is bound to have a negative impact on the banking stocks, especially the PSU bank stocks,” said an analyst.

“While the credit quality has not taken a beating for most of the banks till date (except for a few), we believe that with any upward pricing of loans from hereon, the credit quality may suffer. Some of private sector banks like ICICI Bank and HDFC Bank have already started witnessing stress on high-priced non-collateralised portfolio. With the rise in the prime lending rate, deterioration in other portfolios cannot be ruled out, says a research report by Emkay Share & Stockbroking.

Although this rate hike has been considered as one of large magnitude, the marketmen do not reject a possibility of further stringent measures such as these by the monetary authorities.

“The rate hike comes at the right time, as it seems that the inflation could go up further. Also the RBI might have to resort to further monetary tightening measures in the future, if that happens,” said Mr Nandkumar Surti, CIO, Fixed Income, JP Morgan Asset Management India Ltd.

“As the main cause of worry is the oil price which if continues to go up will lead to a worsening of the fiscal situation,” added Mr Surti.

Even before the inflation curbing measures were adopted by the RBI on Tuesday, a research report by Merrill Lynch on the emerging markets, had reported that the global emerging markets investors are very bearish on Asia.

This week, Morgan Stanley too lowered its estimate and cut the ‘fair value’ of the Sensex by 9 per cent. It also suggested avoiding industries including financial, industrials, and consumer discretionary companies, utilities and metals.

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