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Tuesday, July 26, 2011

Market tanks after RBI Credit Policy

Today RBI declared its credit policy and hiked the Repo Rate and as RBI keeps a difference of 100 basis points between Repo and the Reverse Repo Rate, Reverse Repo Rate too was hiked.
Market was expecting at the most 25 basis point hike and that’s why reacted negatively. Before the announcement of the credit policy Sensex was 16 points above yesterday’s close but tanked by 231 points after it. Bank, auto and reality stocks were most negatively affected.
Repo Rate and Reverse Repo Rate both were hiked by 50 basis points to 8% and 7% respectively.
CRR was left untouched at 6%. RBI governor supported this step attributing it as a must measure for long term economy growth.
Since March 10, it is the 11th consecutive rate hike. RBI governor Mr.  D Subbarao considered inflation to be a major economic concern.
Inflation in India was not getting tamed due to higher commodity prices especially crude. Despite concerns about US economy and European debt crisis, crude was not falling and any slightest sign of recovery abroad could cause speculation in international crude prices.
Domestic inflation was increasing due to factors like higher MSP (Minimum Support Price) for food commodities and higher crude prices despite US releasing a fraction of its SPR (Strategic Petroleum Reserve).
RBI’s step shall make loans costlier and those who are availing loans at floating rates shall have to either pay higher EMIs or shall have to seek higher loan tenure.
RBI expects inflation to be around 6% around March 12.
Now all eyes sets on incoming monsoon, good monsoon shall result in subsiding food commodity prices which translates significantly in the inflation.

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