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Our Bureau

Mumbai, July 29 Although the stock market was expecting a rate hike by the RBI, the magnitude of the hike took the market by surprise, as was quite evident from the 550-points drop the Sensex witnessed after the announcement on Tuesday.

The central bank increased the repo rate by 50 basis points (bps) to 9 per cent and the Cash Reserve Ratio (CRR) by 25 bps to 9 per cent. Since April of this year, the RBI has increased the repo rate by 125 bps and the CRR by 150 bps.

“I think the RBI might further increase the benchmark rate by another 0.5 to 0.75 percentage points,” said Mr Alex Mathew, Head of Research at Geojit Financial Services.

In the short run, this move is not good for industry; higher interest rates translate into lower growth for corporations, he said. “Today we saw huge sell offs in the banking, realty, auto and capital goods sectors for which liquidity needs to be very high.”

The tightening was stronger than expected, Mr Tushar Poddar, Vice-President Asia Economic Research, Goldman Sachs, said.

“We expect the banks to pass on these increases on to lending rates. We think higher interest rates will slow investment demand and growth and the impact will be felt in FY10. We expect ‘tightening’ bias will continue in the near term and now expect a hike of 25 bps in the repo rate and the CRR respectively by end October.”

“From the stock market perspective, with capital becoming dearer, we expect the impact of this to be visible not only on the rate-sensitive sectors such as banking, realty and auto, but also on corporate profitability as a whole, as most sectors and companies have embarked on huge capacity expansion plans,” Mr Hitesh Agrawal, Head of Research at Angel Broking said.

“Clearly for the stock market, the move has a negative impact in short-to-medium term. The interest rate-sensitive sectors such as automobiles, banks and realty will be hit hard with the rising cost of money,” added Mr Bhavesh Shah, Vice-President Research at Asit C Mehta.

“The sharp rate hikes over the last two quarters might slow down the growth momentum. This can happen after a 6-month lag too. Given the inflationary expectations in the economy, these rate hikes are appropriate,” said Mr Sujoy Kumar Das, Head of Fixed Income at Bharat AXA Investment Managers.

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