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RBI step may pull down sensex
June, 25th 2008

RBI kicked into high gear in its battle against inflation when it announced monetary measures to control rising prices late on Tuesday. The central bank hiked the repo rate by 50 basis points with immediate effect and also pushed up the cash reserve ratio (CRR) by 50 basis points in two stages.

The announcement came in after market hours, sparking off concerns over how the bourses will react in the next few sessions. Sensex and nifty had already hit new lows for the year 2008 earlier in the day. Now that the RBI has announced the monetary measures most experts say the market is likely to slide further from this point. "There is some downside from this point in the short -term. Equity as an asset class is going through a rough patch in India," said Hitesh Agrawal, head of research, Angel Broking.

The RBI move comes at a time when the situation looks bleak for markets across the globe. So far this year the market has come off its peak by almost 35% and inflation and crude oil prices are at record highs.

"I think it is strong signal of tighter liquidity and higher cost of credit. This move has also come at a time when global flow of credit has dried up and foreign inflows are hard to come by. Due to all these factors the overall impact will be disproportionately high. The market will open lower, but there are other factors like crude prices that will also impact trading," said Ramdeo Agrawal, co-founder, Motilal Oswal Securities.

The rate hike has not yet been factored into the current market prices. This is because most players were expecting some tweaking in the repo rate and the CRR hike, but there were various combinations that the RBI could have implemented. The news of 50 basis points hike in repo and CRR is likely to drag the markets lower.

Market players feel that the its a clear signal that interest rates are headed northward. Even banks which were postponing hikes after the last repo rate increase will now be forced to raise rates. And market players are clearly unhappy about this.

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