Markets tumble as RBI stuns with 40bps rate hike, 50bps rise in CRR; other factors also at play

The Indian market fell sharply on May 4 after Reserve Bank of India governor Shaktikanta Das raised the repo rate by 40 basis points to 4.40 percent and the cash reserve ratio by 50 bps to 4.5 percent in a surprise announcement at 2pm.

The market, which was trading marginally lower, slumped following the announcement. Investors were cautious with the US Federal Reserve policy meeting outcome scheduled later in the day.

At 3pm, the Sensex was down more than 1,300 points, or 2.34 percent, at 55,642 points and the Nifty lost over 400 points, or 2.35 percent, at 16,667 points.

"The Fed decision expected late tonight will be crucial in determining the trend of the markets globally. Markets already know and have discounted 50 bps rate hike and $ 95 billion worth balance sheet reduction.

“Therefore, market trends after the Fed announcement will be influenced by the Fed's guidance on inflation, future rate hikes and further balance sheet reduction," said Dr V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Here are the factors spooking the market:

1 RBI's unscheduled statement

Das made the unscheduled statement after 2pm on the day the US Federal Reserve will share the outcome of its policy meeting later in the day.  Since the RBI turned hawkish last month as inflation jumped, analysts had been expecting an aggressive rate hike.

After the announcement, the rupee erased its morning gains and was trading flat, while the 10-year bond yield fell sharply. At 12.50 pm, the rupee was trading at 76.53 a dollar, down 0.02 percent from the last close, while the 10-year bond yield rose 7 bps to 7.187 percent.

Earlier in the trade, the rupee had strengthened to 76.39 a dollar from its previous close of 76.52, while the 10-year bond yield was marginally higher at 7.128 percent against its previous close of 7.117 percent.

2 US Fed meeting outcome

Investors were cautious ahead of the Federal Reserve outcome. The Fed is widely expected to hike the rates by 50 basis points, the biggest such adjustment in more than two decades.

Catch all the news related to LIC IPO here

3 LIC IPO

Some analysts said Indian markets were falling as domestic investors lightened positions ahead of the LIC IPO, the biggest ever for the Indian market.

The anchor investor showed that 71 percent of the subscription came from 15 domestic mutual funds.

Also read: LIC IPO: Here's how you can max out bidding for the mega public issue

4 FII selling

Continued selling by foreign investors amid surging inflation and the Russia-Ukraine war has spooked investors.

FIIs remained net sellers for the seventh consecutive month in April. They sold $3.82 billion worth of shares in the month and have they sold $17.34 billion in equities in 2022, so far. In the last seven month, FII liquidated $22.11 billion in equities.

5 Russia-Ukraine war

Investors were also worried after the European Union banned coal imports from Russia in its first move targeting Moscow’s crucial energy revenue but some member states said the bloc needs to do much more to punish Moscow for its Ukraine invasion.

The sanctions package, which also prevents most Russian trucks and ships from entering the EU, was signed off by the bloc’s diplomats in late April, France announced.

(With inputs from Bloomberg)