INDIAN STOCK MARKET

Stepping up its fight against inflation, the Reserve Bank of India on Tuesday tightened money supply further by raising the cash reserve ratio by 25 basis points, the second time in less than a month.

Even as it left its key repo and reverse repo rates unchanged, the central bank signaled readiness to act again if price pressures built up.

The 25 bps hike in CRR to 8.25 per cent would suck out over Rs 9,000 crore excess funds from the banking system, in addition to the Rs 18,500 crore already garnered by the 0.5 per cent increase in CRR announced on April 17.

The move is aimed at fighting inflation which is ruling at an intolerable 7.33 per cent. The high rate has prompted RBI to revise its inflation comfort band from the earlier 5.00 per cent to 5.50 per cent.

The CRR hike took everyone by surprise, but since the market had expected some revision in reverse repo rates, which did not happen, the CRR hike was discounted.
The credit policy has come in line with our expectations, except the CRR hike of 25 basis points. Leaving the repo rate unchanged was well called for an economy which has been witnessing signs of slowing down. It seems that RBI wants to contain inflationary expectations through liquidity management. The central bank has agreed that inflation has been driven by supply side factors and wants to wait to see the impact of fiscal and monetary measures taken so far. However, RBI has been hawkish in its stance on inflation and ready to take more measures if needed in future,” said Krupesh Thakkar, research analyst (economy), India Capital Markets.

Said Ajay Parmar, head of research at Emkay Shares & Stock Brokers, “RBI's move has come in as a surprise... We were expecting a revision in terms of repo rate, but the second CRR hike has led to a steep rise in the ratio. The policy stance clearly indicates that RBI is more concerned of inflation and should provide good indication for growth. Market seems to be cheering the fact that key rates have been left unchanged; this was widely expected to be raised. It has discounted the hike in CRR; the effects will probably be seen tomorrow or in the coming days.”

Although measures to tackle inflation are widely expected to trip economic expansion, the RBI projected India's GDP to grow by a healthy 8-8.5 per cent for 2008-09 assuming that global financial and commodity markets and economy will be broadly aligned with the central scenario and normal monsoon conditions prevail.

Reacting to the same, Subramanyam Pisupathi, research head, Ventura Securities, said, “It’s a firm balance struck between managing growth and inflation. It indicates that growth has not taken a back seat as the RBI governor expects GDP growth of over 8 in 2008-09. The rally is a ‘thank-you’ rally from the market.”

ICICI Bank’s Joint Managing Director & CFO, Chanda Kochhar, said, “The policy is a clear indication that the focus of RBI will be on liquidity management while leaving the decision to adjust interest rates to the banking system. On the whole, this policy reinforces our belief that the year ahead will bring in robust growth with a sound financial system while our efforts to manage inflationary pressures will continue.”
The market will now take cues from corporate earnings and US Federal Reserve's move on interest rates on Wednesday.