04-03-2007, 05:27 AM
<!--QuoteBegin-->QUOTE<!--QuoteEBegin--><b>RBI move backfires </b>
Pioneer News Service | New Delhi
Desperate bid to check prices fails, markets crash
Stock market is the latest casualty of the Government's desperate attempt to control inflation through the Reserve Bank of India's monetary intervention, which has sent borrowing rates soaring and taken away homes, cars and consumer durables out of the reach of the common man.
The mayhem at market will be a big setback for the UPA Government's attempt to paint a rosy picture of the economy. With the Planning Commission asking the Government to bring down the GDP rate of growth to contain inflation, further RBI intervention cannot be ruled out. More so because despite a series of measures, inflation still stands at 6.5 per cent, far above the RBI's target range of 5 to 5.5 per cent.Â
Investors had to helplessly watch Rs 1.5 trillion going down the drain in a single day as the Sensex crashed under pressure from the RBI's move to limit money flow. The market lost 617 points and the Sensex ended at 12,455.37 points while Nifty lost 188 points and ended at 3,633 on Monday. More than half the loss was shouldered by invest-ors in the country's 30 biggest blue chip companies, which saw an erosion of over Rs 80,000 crore in market value.
The RBI on Friday had raised its short-term lending rate by 25 basis points to 7.75 per cent and also hiked CRR (the proportion of deposits that banks have to keep as cash) by half a percentage point to 6.5 per cent. The measures would squeeze liquidity and make credit costs rise sharply. The country's largest lender of consumer loans, ICICI Bank reacted accordingly and increased its consumer loan rates by 1 per cent to 12.75 per cent on Saturday itself.
Fears of a sharp rise in interest rates took a heavy toll of not only banking, but also auto, construction, consumer durables and capital goods stocks also. Information technology stocks also posted heavy losses. IT major Wipro's market cap was reduced by over Rs 4,000 crore while banking scrips like ICICI Bank, which suffered the brunt of the melting markets, lost close to Rs 4,000 crore and HDFC dropped by over Rs 1,000 crore. Car market leader Maruti plunged over eight per cent taking its market cap down by about Rs 1,500 crore.
Continuous rate hikes will have a stiffening impact on financial markets, say experts. Market observers say selling in banking stocks was mostly triggered on fears that sector's interest income would dip by nearly Rs 2,000 crore on account of the twin measures to hike CRR, coupled with reduction in the interest that the RBI will pay on cash reserve.
<b>Sensex plummets by 617 points
On first trading day of new fiscal
RBI move was targeted to curb money supply
It resulted in harder interest rates
Could shave off growth in economy
Real estate, automobile sectors set to suffer a hit
Biggest fall in over nine months
Already top lender ICICI Bank has announced hike in prime lending rate
This follows RBI's hike in key short-term lending rate and CRR
Fears of fall in auto sales influenced trading sentiment</b><!--QuoteEnd--><!--QuoteEEnd-->
Pioneer News Service | New Delhi
Desperate bid to check prices fails, markets crash
Stock market is the latest casualty of the Government's desperate attempt to control inflation through the Reserve Bank of India's monetary intervention, which has sent borrowing rates soaring and taken away homes, cars and consumer durables out of the reach of the common man.
The mayhem at market will be a big setback for the UPA Government's attempt to paint a rosy picture of the economy. With the Planning Commission asking the Government to bring down the GDP rate of growth to contain inflation, further RBI intervention cannot be ruled out. More so because despite a series of measures, inflation still stands at 6.5 per cent, far above the RBI's target range of 5 to 5.5 per cent.Â
Investors had to helplessly watch Rs 1.5 trillion going down the drain in a single day as the Sensex crashed under pressure from the RBI's move to limit money flow. The market lost 617 points and the Sensex ended at 12,455.37 points while Nifty lost 188 points and ended at 3,633 on Monday. More than half the loss was shouldered by invest-ors in the country's 30 biggest blue chip companies, which saw an erosion of over Rs 80,000 crore in market value.
The RBI on Friday had raised its short-term lending rate by 25 basis points to 7.75 per cent and also hiked CRR (the proportion of deposits that banks have to keep as cash) by half a percentage point to 6.5 per cent. The measures would squeeze liquidity and make credit costs rise sharply. The country's largest lender of consumer loans, ICICI Bank reacted accordingly and increased its consumer loan rates by 1 per cent to 12.75 per cent on Saturday itself.
Fears of a sharp rise in interest rates took a heavy toll of not only banking, but also auto, construction, consumer durables and capital goods stocks also. Information technology stocks also posted heavy losses. IT major Wipro's market cap was reduced by over Rs 4,000 crore while banking scrips like ICICI Bank, which suffered the brunt of the melting markets, lost close to Rs 4,000 crore and HDFC dropped by over Rs 1,000 crore. Car market leader Maruti plunged over eight per cent taking its market cap down by about Rs 1,500 crore.
Continuous rate hikes will have a stiffening impact on financial markets, say experts. Market observers say selling in banking stocks was mostly triggered on fears that sector's interest income would dip by nearly Rs 2,000 crore on account of the twin measures to hike CRR, coupled with reduction in the interest that the RBI will pay on cash reserve.
<b>Sensex plummets by 617 points
On first trading day of new fiscal
RBI move was targeted to curb money supply
It resulted in harder interest rates
Could shave off growth in economy
Real estate, automobile sectors set to suffer a hit
Biggest fall in over nine months
Already top lender ICICI Bank has announced hike in prime lending rate
This follows RBI's hike in key short-term lending rate and CRR
Fears of fall in auto sales influenced trading sentiment</b><!--QuoteEnd--><!--QuoteEEnd-->