How do mkts react to unscheduled rate hikes?

By Anichya Shah, CNBC-TV18

The Reserve Bank of India, or RBI, has hiked the repo rate by 25 bps to 8% from 7.75% to contain inflation concerns. There has been no change in the reverse repo rate.

It has been over a year since interest rates have been hiked. The last time it happened in March, whenever it is unannounced or happens in the evening or not on a Monetary Policy day, we have seen the Banking Index, the real estate space and even the Auto Index sell-off a fair bit in trade.

When it usually comes with the Monetary Policy, the reactions are not so severe, which is why today is a fair bit of a contrarian bet. That is why we are seeing the Auto Index and the Bankex still pretty flat. That is usually not inline with what was seen earlier.

The first unscheduled rate hike was on June 9, 2006 when the repo rate was increased to about 6.75% and the day after the bankex sold about 4%. The Sensex sold off about 3.4%, and the auto index was down 3.2%.

On July 25, the next scheduled hike, when the repo rate was hiked by another 25 bps to about 7%, the bankex, Sensex and the Auto Index rallied the next day between 1-2.5%. The next scheduled hike was on October 31, 2006 and the day saw all three indices rally a fair bit. They were pretty flat but up about 0.5-1%.

On January 31, 2007, on the day after the hike, the Bankex rallied about 2.1%. The Sensex was up 1.2% and the auto index was up close to 1%. The most recent rate hike, before yesterday’s rate hike on March 30, 2007, was an unscheduled rate hike. We saw the CRR being hiked by 50 bps. On the next day, the Bankex sold off 6% and the Sensex was down 4.7%, while the auto index was down 5.9%. So, it is clearly a contrarian trend to what we have been seeing in days of unscheduled hikes.