Sensex crashes over 1400 points as RBI hikes repo rate by 40 bps to 4.40%

In a surprise move, the Reserve Bank of India (RBI) Governor Shaktikanta Das on Wednesday announced hike in benchmark interest rates by 40 bps to 4.40 per cent with immediate effect.

The announcement comes after the bank's Monetary Policy Committee (MPC), headed by Das, met on 2-4 May in an "off-cycle" meeting.

Equity benchmark indices crashed after the RBI's announcement. The 30-share BSE benchmark Sensex crashed over 1400 points to hit an intraday low of 55,557.46 and Nifty tanked over 400 points to 16,645.15.

Bajaj twins were the top losers on Sensex, followed by Titan, HUL, RIL and HDFC Bank.

The central bank had last revised its policy repo rate or the short-term lending rate on May 22, 2020, in an off-policy cycle to perk up demand by cutting the interest rate to a historic low.

Equity benchmarks Sensex and Nifty turned choppy on Wednesday in early trade, tracking weakness in index heavyweights Reliance Industries, TCS and HDFC Bank amid a mixed trend in global markets.

On Monday, the BSE benchmark went lower by 84.88 points or 0.15% to settle at 56,975.99 and the Nifty declined 33.45 points or 0.20% to close at 17,069.10.

Equity markets were closed on Tuesday for Eid-Ul-Fitr.

"The repo rate hike and CRR hike announced by the RBI Governor today in an unscheduled call is a negative event for markets. Barely a month ago the same MPC had not only kept the rates unchanged but had also maintained the accommodative stance. This sudden U-turn will now raise worries whether the RBI is suddenly panicking or reacting to the rate hikes by other central banks, especially the Fed," Abhay Agarwal, Founder, and Fund Manager, Piper Serica told Business Today.

"This rate hike seems to acknowledge that the inflation is more sticky than earlier anticipated. It is a moot point whether increasing the rates will cool off the demand by sucking out liquidity from the system. This point is important since this is a major shift from the earlier assumption that inflation is driven by supply chain issues rather than excessive demand based on speculative access to cheap capital. The big worry is that this sudden rate hike may do more damage to the nascent recovery in consumption demand which will in turn have negative ramifications for private sector capex plans," he said.

"India needs capital to fund its growth. This policy flip-flop will make the capital more expensive and scarcer. While there is hope that the policy stance will revert to normal after the inflation cools off no investor will bet on it in the short term. Short term savers will benefit from the spike in bond yields however the borrowers will need to be ready for higher EMIs. We expect the credit cost for lenders will go up and NIMs will come under pressure leading to continued underperformance by stocks of large banks and NBFCs," he added.