Dalal Street Corner: Market extends weakness for 3rd session as RBI hikes rate; what should investors do on Thursday?

Extending the weakness for the third straight session, the domestic equity market fell more than 2% on Wednesday. The weakness in the market were largely due to an unscheduled rate hike by the Reserve Bank of India (RBI) and awaited FOMC meeting minutes. Tracking these two developments, benchmarks Nifty50 and the Sensex declined by 2.29% each.  

Maximum selling pressure was seen in media, realty and consumer durable stocks, followed by auto banking and financial services as all sectors closed deep in the red on Wednesday 

"Although the rate hike was anticipated, the sudden announcement of a 40bps increase in repo rate along with a 50bps increase in CRR in response to the rising inflation spooked markets leading to a heavy selloff," said Vinod Nair, Head of Research at Geojit Financial Services. 

Global markets are also trading cautiously ahead of the upcoming Fed meeting, as an increase of more than 50 bps will extend the current consolidation phase, the expert added. 

VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said the MPC's decision, in an unscheduled meeting, to raise the repo rate by 40bp and CRR by 50 bp is a surprise since it came on the LIC IPO opening date.  

MPC's proactive move is justified from the perspective of inflation management, but the timing leaves a lot to be desired, he said. "The above 1000-point crash in Sensex has soured the sentiments on the opening day of India's largest IPO. The 10-year bond yield has spiked to above 7.39% indicating an imminent rise in the cost of funds," he added.  

Reacting to market fall post RBI rate hike and approach an investor should employ in the current market scenario, Sorbh Gupta, Fund Manager- Equity, Quantum AMC, said RBI’s surprise move on increasing the repo rates today is an acknowledgment of inflation becoming a more important variable in policy decisions than growth.  

It will not have an immediate bearing on growth in inflation but it is an indication of things to come, he said. These events will come and go multiple times in an investor’s journey to achieving financial goals and one should not be swayed too much.  

"An equity portfolio stress-tested for balance sheet strength (lower leverage) & attractive valuations of investee companies is well suited for this environment. Investors should stick to their asset allocation plans & use a staggered approach to increase allocation to equities," added Gupta.      

RBI surprised the markets with a 40 bps hike in repo rate and a 50 bps CRR hike, in an off-cycle meet by the MPC on Wednesday, said Unmesh Kulkarni, Managing Director Senior Advisor, Julius Baer India. 

Kulkarni was of the view that while RBI is committed to ensuring sufficient liquidity, the policy stance looks to have already changed to neutral-to-hawkish, which it may officially announce in the June MPC meet. 

"The markets have obviously been taken by surprise, and the 10-year benchmark g-sec yield jumped intra-day to 7.40%. Given the enhanced government borrowing calendar this year, RBI has a tough job at hand, to manage the market's expectations of yields, while seeing the weekly auctions through in a non-disruptive manner," he added 

Earlier, in a move that will raise borrowing costs for corporates and individuals, the RBI on Wednesday after an unscheduled MPC meeting hiked the benchmark lending rate by 40 basis points (bps) to 4.40 per cent to contain inflation, which has remained stubbornly above the target of 6 per cent for the last three months. 

This is the first-rate hike since August 2018 and the first instance of the MPC making an unscheduled increase in the repo rate (the rate at which banks borrow from the RBI).  

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)