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BSE Sensex, Nifty surge despite first RBI rate hike in over 4 years

The Reserve Bank of India's (RBI) first repo rate hike in over four years failed to dampen market sentiments on Wednesday, with the benchmark index Sensex closing 0.79% higher.

After a volatile session, the 30-share BSE Sensex ended at 35,178.88, up 275.67 points, while the broader NSE Nifty closed at 10,684.65, up 91.50 points, or 0.86%.

RBI's rate-setting panel - the monetary policy committee - voted unanimously to raise the repo rate by 25 basis points (bps) to 6.25%, and retained its neutral policy stance. It cited rising oil prices and higher core inflation momentum amid signs of stronger growth as the main reason for the rate hike.

One basis point is one-hundredth of a percentage point.

According to analysts, the RBI rate hike indicates that the down-cycle of interest rates is over, but the monetary policy review has nothing negative for the markets. They said RBI retaining the neutral stance has raised hopes that there could be no more rate hikes this year.

"To some extent, the markets were expecting that the RBI may hike rates or change its stance as crude prices are higher, US Federal Reserve is going to increase rates and inflation was rising. RBI has front-loaded the rate hike as most of us were expecting a hike by October or so. Unless something goes drastically wrong, the central bank is not going to hike rates," said Amar Ambani, partner and head of research at IIFL Investment Managers.

Deepak Jasani, head of retail research at HDFC Securities Ltd, said the RBI rate hike was already discounted by market participants and some felt that a 25 bps hike is better than a 50 bps hike. "That is one of three reasons for the market surge today. RBI maintaining neutral stance was welcomed by the markets and the central bank's commentary on bond markets, banks and realty was taken positively," he said.

According to Dasani, had RBI's policy stance been hawkish, the market reaction would have been different. "In August, RBI will review the progress of the monsoon and the impact of minimum support prices (MSP), after which they will take a fresh call on whether to go ahead with further hikes. For the time being, corporates need not worry too much. Currently, availability of liquidity is more important than cost of liquidity," he said.

However, Motilal Oswal, chairman and managing director at Motilal Oswal Financial Services Ltd, thinks the rate hike at this juncture was the best thing to do, and that India is in a situation where anything sharp can hurt the economy. "If we raise the interest rates too fast and too sharp and try tightening the money supply, it can hurt corporate earnings which are just about on cusp of expanding," Oswal said.

As foreign institutional investors continue to sell Indian shares, the markets are more concerned about the exodus of global liquidity as the US Federal Reserve is on course to increase interest rates in its June meeting and may even indicate another rate hike this year.

So far in 2018, foreign institutional investors (FII) have sold Indian equities worth $1.06 billion while domestic institutional investors (DII) including mutual funds and insurance companies have bought shares worth Rs49,283.66 crore.

Meanwhile, there is a view that there could be another rate hike of 25 basis points in August.

"RBI's decision to maintain a neutral stance suggests that it does not want to signal that it is embarking on a tightening cycle and that it remains data dependent. We believe that both growth and inflation are likely to head higher in the coming months, paving the way for another 25 bps rate hike in August," Nomura said in a report dated 6 June.

Care Ratings Ltd also expects one more interest rate hike of at least 25 bps during 2018. "We cannot rule out the possibility of two rate hikes by the end of the financial year 2018-19, which will be dependent on the developments at the global front with regard to oil prices and its likely impact on domestic inflation," it said in a note dated 6 June.

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