Market crashes after RBI's surprise ~2% rate hike. Nifty 50 ended today at -2.29% and Sensex at -2.29%. The RBI's monetary policy committee hiked interest rates by 40 basis points, citing persistent inflationary pressures in the economy. With the rapidly changing geopolitical scenario continuing to put pressure on the global supply chain and commodity prices, domestic policy rates were expected to adjust to the changing scenario. Therefore, while not unexpected as the RBI governor had already voiced concerns about rising inflation, the rate hike is expected to have its impact on the housing market amid rising input costs. In a surprise move, the central bank hiked interest rates to keep runaway inflation in check. There was a sense of déjà vu when the RBI announced policy measures outside of its regular calendar of meetings, as it did in May 2020. The increase in the repo rate aims to alleviate high inflationary pressures. While raising the CRR aims to ease loose monetary policy and drain excess liquidity from the system. The governor's observation of food inflation is a cause for concern. RBI's assurance that next steps will be calibrated and consideration of economic recovery offer positive direction, along with policy stance kept unchanged at Accommodative.
The industry has benefited greatly from the low
interest rates over the past two years. This rate hike will result in higher
PMIs for home loans. However, we believe improved homebuyer attitudes,
preference for home ownership and strong wage growth will continue to support
the housing market. Monetary policy remains accommodative and given the easing
of the pandemic and economic growth, we expect consumer demand to remain
buoyant in the short-term. Although the rate hike was expected, the sudden
announcement of a 40 basis point hike in the repo rate along with a 50 basis
point hike in the CRR in response to rising inflation spooked markets and prompted
a violent sell-off. Global markets are also trading cautiously ahead of the
forthcoming Fed meeting as a rise of more than 50 basis points will prolong the
current consolidation phase. Finally, as mentioned, we are watching the 7.35
level on the 10-year benchmark. The level was taken today due to a
surprise hike in repo rates by the RBI. The next technical level to watch for
is 7.60% when the close is above the 7.35% level. By raising the CRR, the RBI
is forcing the banking system to hold additional liquidity in reserves instead
of lending it to companies at lower interest rates. Around Rs 80,000 cr will
not be available for lending by the banking system from May 21, 2022. Current
liquidity in the system is approximately Rs 7 lakh crores and funding costs are
likely to increase. We see overall incremental lending rise above tenor after
RBI's move today. Benchmark indices lost over 2% on May 4 after the Reserve
Bank of India (RBI) hiked interest rates. At the close the Sensex was down 1306
points to 55669 and the Nifty down 391 points to 16677. I would agree that the
central bank's credibility has been fairly restored. It's absolutely well timed
and now the forward guidance is pretty clear... I expect we'll be back to
pre-pandemic levels of 5.15% by the end of the year. We used to be closer to
five percent, so this is definitely a bit higher than we used to think.
Investors should be cautious in these markets and use these declines to build
new positions in fundamentally sound stocks. Immediate support and resistance
for Nifty are at 16,500 and 17,000 respectively.
Resistance: 16800, 16950, 17100
Support: 16650, 16500, 16350
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