Additional CRR spoils the party for banks, inflation forecast hike drags FMCG

With RBI MPC announcements out of the way, Indian markets are now watching out for U.S. CPI numbers to be released later in the evening

The Indian equity market extended its opening losses on August 10 after the Reserve Bank of India threw a couple of surprises at investors. While the decision to hold benchmark policy rates was largely factored in, analysts said the incremental CRR for banks and a big hike in Q2 inflation forecast spoiled investor sentiment.

Banks have to maintain a 10 percent incremental cash reserve ratio (ICRR) from August 12 as part of the central bank's efforts to drain excess liquidity from the banking system following the withdrawal of the Rs 2,000 currency notes.

Following this announcement, Nifty Bank broke into the red and touched the day's low of 44,435. Nifty 50 touched day's low of about 19,510, about 0.7 percent lower from previous close. Sensex, too, traded in the red about 0.6 percent lower.

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Temporary measure

"We should have seen the incremental CRR move coming. RBI had taken a similar step after demonetisation, too. It is a good step as too much liquidity in the system is not good for inflation," Saugata Bhattacharya, chief economist at Axis Bank said.

Banking stocks reacted negatively as they will not earn any interest on the funds kept under ICRR.

This ICRR is a temporary measure and will be reviewed on or before September 8. Meanwhile, CRR (cash reserve ratio) remains unchanged.

The Reserve Bank of India (RBI) also made an upward revision to its inflation forecast for 2023-24, raising it by 30 basis points to 5.4 percent. July-September 2023 Consumer Price Index (CPI) inflation forecast has been sharply raised to 6.2 percent from 5.2 percent.

Nifty FMCG and Nifty Auto indices both fell 0.7 percent and 0.3 percent, respectively after the upward revision. Tata Motors, Hero Motocorp, Tata Consumer Products, and Nestle India were among the biggest losers.

"The RBI MPC commentary on Thursday can be characterised as a pause with hawkish underpinnings... There was emphasis that further action will be warranted on signs of un-anchoring in inflationary expectations as well as if inflation stays above the mid-point target of 4 percent on a durable basis," Radhika Rao, Executive Director and Senior Economist, DBS Bank said.

RBI is not ruling out hikes if necessary, and clearly cuts are out of sight.

With RBI MPC announcements out of the way, Indian markets are now watching out for U.S. CPI numbers to be released later in the evening. The figure is expected to show a slight acceleration from last year. On a month-to-month basis, consumer prices are seen increasing 0.2 percent, the same as in June.

The CPI figure will give clarity on Federal Reserve's further steps.

Meanwhile, the short-term market structure seems to lean towards a sell-on-rise pattern. "There's a discernible risk that the Nifty index might experience a decline toward levels around 19,191 and 18,888 unless it manages to surpass the 20-Day Moving Average (20-DMA) threshold of 19,650," Santosh Meena, Head of Research at Swastika Investmart said.

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