Markets take a hard knock

Equities fell and the rupee weakened on Friday following a surprise decision by the Reserve Bank of India (RBI) to raise the repo rate, at which banks borrow from the central bank.

On Thursday, stock indices were at their highest level in nearly three years. But a day later, the S&P BSE Sensex, the BSE's bellwether index, fell 595.21 points during the day before recovering to close with a loss of 382.93 points, or 1.85 per cent, at 20,263.71. The National Stock Exchange's Nifty index closed at 6,012.1.

The rupee ended at 62.28 to a dollar against the previous close of 61.78, a weakening of 0.81 per cent.

Government bond yields rose sharply. RBI would auction government bonds for a notified amount of Rs 15,000 crore on Monday, due to which sentiment in the bond market might continue to be bearish. "The 7.16 per cent 2023 bond may trade in the range of 8.65-8.40 per cent next week. There could also be a partial devolvement in Monday's auction," said S Srinivasaraghavan, head of treasury at Dhanlaxmi Bank.

"Today's weakening in the rupee is due to a knee-jerk reaction to the equity selloff we saw immediately after policy," said Brijen Puri, executive director and head of markets, JP Morgan. "But partial reversal of the liquidity tightening measures and raising the repo rate will give some comfort." (How RBI steps impact markets)

S P Tulsian, independent analyst, said: "The repo rate hike is seen as a negative for the market.... Interest rates are not going to soften, which would be a negative for interest rate-sensitive segments."

 

Navneet Munot, chief investment officer at SBI Funds Management, said: "The repo hike was not expected. The market also fell because some kind of correction was due after yesterday (Thursday)."

Indices tracking interest rate-sensitive sectors such as real estate, banking, capital goods and automobiles were the worst performers on Friday. These fell between 1.5 and seven per cent. Defensive sectors such as healthcare and information technology outperformed on Friday.

Foreign institutional investors (FIIs) were net buyers by Rs 945.76 crore, according to provisional exchange data. Domestic institutions were net sellers by Rs 790.23 crore.

Deven Choksey, chief executive officer at Kisan Ratilal Choksey Shares & Securities Pvt Ltd, was optimistic on fund flows. "Untill there is some growth coming back into the market, the defensives will remain popular…. Flows from foreign institutional investors are expected to continue."

Turnover on Friday was the highest this month, with trades worth Rs 2.57 lakh crore taking place on the two exchanges. Average volume for the month was Rs 1.68 lakh crore.

The rupee is expected to show some stability in the near term. "RBI has taken a balanced approach. The policy rate hike is to address concerns on rupee/inflation and reduction in the Marginal Standing Facility rate and the Cash Reserve Ratio reduction is to be seen as supportive to growth…. The balanced stance will ensure rupee stability at 61-63 (to a dollar) in the near term," said J Moses Harding, executive director and chief business officer, Lakshmi Vilas Bank.