Market Impact of RBI's Monetary Policy
Recent financial developments have triggered substantial market volatility, particularly in banking and real estate sectors. Key market movements include:
Stock Market Performance
- ICICI shares plummeted 2.4%, reaching a two-year low at 686 rupees
- DLF experienced a significant 3.8% decline, hitting its lowest point since trading began
- Bombay Stock Exchange's Bankex Index decreased by 3.3%
- Real estate index dropped by 4%
Reserve Bank of India's Monetary Intervention
Interest Rate Adjustments
The RBI implemented critical monetary tightening measures:
- Unexpectedly raised interest rates for the second time in two weeks
- Instructed lenders to maintain higher cash reserves
- Responded to surging crude-oil prices pushing inflation to a 13-year high
Specific Policy Changes
- Increased repurchase rate by 0.5 percentage points to 8.5%
- Modified cash-reserve ratio to 8.75%
- Signaled potential continued borrowing cost increases
Expert Analysis
Sampath Kumar from Goldman Sachs provided crucial insights: "Banks could raise lending and deposit rates by 75 to 100 basis points in response to the policy announcement. Increase in lending rates would likely adversely affect market expectations on loan growth, net interest margins and asset quality."
Historical Context
Prior to this intervention, the central bank had:
- Raised repurchase rates eight times in two and half years
- Increased cash reserve ratio seven times since December 2006
- Aimed to slow money supply and control inflation
Cumulative Market Impact
The monetary tightening has resulted in significant index declines:
- 43% slump in Bombay Stock Exchange's bank index this year
- 60% plunge in real estate index
- Compared to 30% drop in the nation's equity benchmark Sensitive Index