Rate hike, global worries pull down markets

Markets declined today as the Reserve Bank of India raised rates and maintained a hawkish stance in the credit policy review. Soft cues from the Asian peers also dampened investor sentiments and kept markets in the negative zone.

The Sensex, after opening at 18,227 touched a high of 18,354. However, with the RBI policy coming in, the benchmark started slipping and touched a low of 18,104. The index finally ended down 209 points (1%) at 18,149. Nifty ended at 5,447 - down 65 points.

RBI raised its short-term lending and borrowing rates by 25 basis points each today to control spiralling prices of essential commodities. The repo rate has been hiked to 6.75% and the reverse repo rate to 5.75%, respectively. However, most analysts have predicted a further hike in key rates during the policy review in May. Moreover, RBI has also increased its inflation estimate for March to 8% from the 7% projected earlier.

“RBI has acted on expected lines. Problem of inflation is still on top of RBI’s mind, so they have continued tightening monetary policy even at the cost of growth momentum slackening”, said Raamdeo Agrawal, Joint MD Motilal Oswal Financial Services.

Investors ignored better-than-expected inflation data as the RBI policy came in. Food price index rose 9.42% and the fuel price index climbed 12.79% in the year to March 5.

Asian markets were in the red today as the nuclear crisis continued in Japan. The earthquake and tsunami has already cost over 4,000 lives and the count may go up more if the nuclear plants are not taken under control. Many residents started evacuating as panic gripped the island nation. Japan's devastating earthquake is expected to cause insured property losses of about $35 billion. Nikkei shed 1.5% to 8,962. Hang Seng dropped 1.8% to 22,284. Jakarta Composite slipped 1.7% to 3,471.

Crude prices, meanwhile, went up once again after easing for two days. Nymex crude was up 1% at $98.89/ barrel, while Brent crude was up 0.7% at $111.48/ barrel.

Advance tax paid by most of the companies have gone up considerably in the fourth quarter of 2011 over the corresponsing quarter a year ago.

BSE mid and small-cap indices outperformed the benchmark and slipped 0.3% each. Most of the sectoral indices also declined. BSE FMCG and IT dipped 1.5% each to 3,414 and 6,083, respectively. Rate sensitives were in red, down aroudn 1% each.

"Repo rate now at 6.75% is still lower than average inflation expected in FY12 of 7.5-8% hence, RBI’s further rate hike could be in the range of 25-75bps depending on the inflation numbers going forward. We remain selective with BOB, UBI and HDFC Bank as our top picks currently", says Dilip Bhat, Joint MD, Prabhudas Lilladher Group.

Maruti Suzuki shed 4.5% at Rs 1,169. HDFC dropped 3.6% to Rs 637. Hindalco dropped 2.5% to Rs 198. Among other metal stocks - Jindal Steel and Tata Steel slipped 1% each.

DLF, Infosys, ITC, Tata Motors, TCS and SBI shed 1-2% each. Market heavyweights - Reliance, ICICI Bank and Larsen & Toubro dropped over 1% each in trades.

Meanwhile, Reliance Communications gained 3.5% to Rs 107 after Citigroup raised its ratings on the company from "sell" to "buy". BHEL jumped 2% to Rs 1,965. Reliance Infra and Jaiprakash Associates, among realty stocks, added 1% each. Cipla was up 1% at Rs 299.

Entertainment stocks surged today. PVR jumped 8% to Rs 104. Cinemax soared 19% to Rs 49.45. Fame India hit its upper circuit of Rs 58.

BSE market breadth was negative. Out of 2,967 stocks traded, 1,638 declined while 1,203 advanced in trades.