But markets head south.
By Rajiv Theodore
NEW DELHI: Expect the unexpected was what the markets had to say on Friday. After Thursday’s impressive gains, the stock market fell in reaction to the unexpected monetary tightening by the country’s apex bank.
It was a reminder of the 1980’s era when US Fed chairman Paul Volcker did the same to contain inflation. Now India’s new Reserve Bank of India (RBI) Governor Raghuram Rajan wants tame inflation out of a moribund economy. It is common sense that a surprise repo rate hike won’t win Rajan many friends, but he has sensibly retreated from his predecessor D. Subbarao’s plan to shore up the falling Indian rupee.
The former Federal Reserve chairman’s tight monetary policy tipped the US economy into recession in the early 1980s, but succeeded in curbing double-digit inflation rates. Following in his footsteps, Rajan raised the monetary authority’s key policy rate by 25 basis points on September 20.
The National Stock Exchange (NSE) hit a high of 6,130.95 and a low of 5,932.85 in the early trade.
Banking stocks and the other rate-sensitive ones were the worst hit followed by capital goods, oil and gas, metal and technology, as investors and traders reacted with dismay and resorted to heavy sell-off.
Markets were caught off guard as the Reserve Bank of India Friday raised the short-term policy repo rate to 7.5 per cent from 7.25 per cent. Retail inflation was at 9.52 per cent last month, while wholesale price inflation rose to a six-month high of 6.1 per cent in August, driven by costlier food items.
Trading began on a cautious note, a day after the stunning rally.
DLF, PNB, Bank of Baroda, Indus Ind Bank, Ranbaxy, JP Associates, L&T, ICICI Bank, Sesa Goa and Hindalco, were among the biggest frontline index losers. While prominent gainers included Reliance Infra, Ultratech Cement, GAIL, HCL Tech, Ambuja Cement, Lupin, Asian Paints, BHEL, BPCL and Grasim.
Soon after announcing the repo rate hike, Rajan said India needs to build a “bullet-proof national balance sheet” to deal with the fallout on the economy from US Fed Reserve’s tapering of stimulus that has been only been postponed not done away with.
“What we need to do is put our house in order before it (tapering) comes back. The postponement of tapering is only that, a postponement. We must use this time to create a bullet-proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike,” he said.
The US Federal Reserve Wednesday decided against tapering its monetary stimulus under which it has been buying assets worth $85 billion every month.
Rajan stressed the need on improving the economic parameters regardless of what the US does so that “we are better prepared for the tapering whenever it happens”.
After a possible indication of tapering by US Fed in May, Indian stocks and Indian rupee had plunged on of large scale capital outflows.