Markets caught off guard by Reserve Bank’s surprise move

The out-of-turn hike in repo rate by 40 basis points (bps) to 4.4 per cent with immediate effect and a 50-bps hike in the cash reserve ratio to 4.5 per cent by the Reserve Bank of India (RBI) on Wednesday took the markets by surprise, said analysts, who expected the central bank to hike rates only in June.

“The hike in rates, although expected, was only likely to come through in the June policy review. The quantum of hike (40 bps) in this outof-turn announcement was also a surprise as the markets expected the RBI to hike by 25 bps. The indices will take their cue from what the US Federal Reserve (Fed) and other global central banks do to tame inflation,” said Vaibhav Sanghavi, co-chief executive officer, Avendus Capital

Public Markets Alternate Strategies.

The development saw the markets tumble, with the S&P BSE Sensex slipping over 1,100 points in intraday deals to around 55,800-levels. Alternatively, the Nifty50, too, shed over 1.5 per cent, or

260 points in intra-day trade, and tested the 16,800-mark.

“India is on the cusp of a policy-normalisation cycle. Elevated Consumer Price Index inflation in 2022-23 (FY23) will likely mean a delayed policy catch-up. We expect 200 bps in cumulative repo rate hikes by the third quarter (Q3) of FY23, starting with a 25-bps hike in June, which will take the terminal repo rate to 6 per cent by Q3FY2023,” wrote Sonal Varma, chief economist (India and Asia ex-japan), Nomura, in a recent co-authored note with Aurodeep Nandi.

In the last policy meeting in April, the monetary policy committee of the RBI had shifted its focus to tackle rising inflation in India after the Russian invasion of Ukraine led to a surge in commodity prices, especially of crude oil, which zoomed to over $140 a barrel — a 14-year high.