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Markets cool to RBI cash squeeze

Experts say that the 50-basis point hike in CRR by RBI may not cause a panic reaction in stock markets as the move was expected, reports Vyas Mohan.

business Updated: Apr 19, 2008 02:10 IST
Vyas Mohan

The 50-basis point hike in Cash Reserve Ratio by the Reserve Bank of India late on Thursday may not cause a panic reaction in stock markets as the move was expected, say market experts.

Though the timing of the CRR hike, well ahead of the central bank's policy meeting scheduled on April 29, surprised many, stock markets were anticipating a move of similar magnitude. Analysts say the markets have already factored in the possibilities of a liquidity tightening measure from the central bank and thus may not see a drastic fall as a reaction to it.

Further, at a time when domestic markets are more linked to its global peers, anticipated moves like this hike are unlikely to create any drastic fall.

"Though it is not a market-friendly measure, the expectation of such a move had been built into the markets to some extent. My sense is that it has more or less been factored into the markets. And these days our markets are eagerly following global cues. So, much would depend on how the Dow and other major indices do," said Ramdeo Agarwal, Joint Managing Director of Motilal Oswal Securities.

After market hours on Thursday, the RBI hiked CRR or that portion of deposits that banks need to have on hand as cash to 8 per cent, as an anti-inflationary and liquidity tightening exercise.

"The move is largely in line with market expectation. Inflation has been running over the RBI comfort ceiling of 5 per cent for seven consecutive weeks with the last reading of 7.14 per cent in week ending April 5.

Banks deposited an average of Rs 27900 crore per day in the reverse repo window in the last fortnight signalling excess liquidity in the system. The move will impact banks negatively, though it is in line with market expectations," Goldman Sachs said in a report commenting on the hike.

The 30-share Sensex of the Bombay Stock Exchange ended Thursday at 16,481.20 points, up by 237 points or 1.46 per cent, while the broader Nifty of the National Stock Exchange closed higher by 1.45 per cent at 4958.40 points.