RBI's surprise rate hike wipes off Rs 6 lakh crore of investor wealth

The market doubled its losses immediately after the Reserve Bank of India on May 4 stunned everyone by hiking the repo rate and the cash reserve ratio (CRR) to tame inflation and suck out of excess liquidity.

The Sensex, which was down 600 points before Governor Shaktikanta Das’ press briefing, fell sharply after the rate hike was announced and ended 1,307 points, or 2.29 percent, down at 55,669.

The Nifty took a beating, too, and broke all its crucial support levels to end around the lows of March, down 392 points, or 2.29 percent, at 16,678.

Investors lost Rs 6.1 lakh crore of wealth in a single day as the BSE market capitalisation fell to Rs 259.73 lakh crore against Rs 265.88 lakh crore in the previous session.

In the last month, nearly Rs 14 lakh crore of wealth has been eroded. On April 5, the BSE market capitalisation was Rs 273.73 lakh crore.

The Reserve Bank of India, in an unscheduled meeting, raised repo rate by 40 bps to 4.4 percent and cash reserve ratio by 50 bps to 4.5 percent.

Also read: Central bank blindsides nation to derail high inflation expectations, says price rise to remain high in near term

"This is is a surprise since it came on the LIC IPO opening date," VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services said.

He said the monetary policy committee’s proactive move is justified from the perspective of inflation management but the timing leaves a lot to be desired.

"More than 1,000 points crash in Sensex has soured the sentiment on the opening day of India's largest IPO. The 10-year bond yield has spiked to above 7.39 percent, indicating an imminent rise in the cost of funds," he said.

Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors, said the CRR hike would immediately take off Rs 87,000 crore as liquidity and about Rs 2 lakh crore due to multiplier effect in the next five-six months.

Also read: RBI Policy | Repo rate hike along with cost-push inflation in construction likely to slow down housing market’s growth: Experts

All sectoral indices closed in the red, with realty, bank, metal, capital goods, auto, telecom, healthcare and finance falling 2-3 percent.

The broader markets was also caught in the bear trap. The BSE midcap index fell 2.63 percent and the smallcap index 2.1 percent.

"We expect equity market to remain volatile in the near term, with range-bound volatility and will take some time to absorb the sudden policy change and would keenly monitor the outcome of Fed and its commentary," Sanjeev Hota, Head of Research at Sharekhan by BNP Paribas, said.

Notwithstanding, "near-term market headwinds, we continue to retain a positive view on equity over the next two-three years, on the back of expectations of a strong bounce back in earnings as macro headwinds subside. With pro-growth government policies, India will witness a multi-year economy upcycle," he said.

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