Weakness to continue as RBI springs CRR surprise

The market is likely to open on a weak note following the surprise hike in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI) late on Tuesday (13 February) after trading hours. The move is likely to raise corporate loan rates, home loan rates, auto loans and rates for personal loans.

The central bank said the cash reserve ratio (CRR) will rise to 6% from 5.5% in two stages, the first on 17 February 2007 and the second on 3 March 2007, to rein in inflation and credit growth. Data on last Friday showed annual inflation rose to a two-year high of 6.58% in late January, above the central bank's target range of 5 - 5.5% for the end of the fiscal year to March 2007. At its quarterly policy review on 31 January 2007, RBI had raised its key short-term rate, the repo rate, by 25 basis points. The CRR hike will suck out Rs 14000 crore from the banking system.

Fears of a further rise in domestic interest rates, and a large number of IPOs lined up for the next few weeks has weighed on the market sentiment of late. The Sensex had tanked 348 points on Monday (12 February 2007) partly due to weak Asian markets, and partly on concerns about a further rise in interest rates. It had ended 100 points lower on Tuesday (13 February 2007) in highly volatile trade.

FIIs turned net buyers in index-based futures on 13 February, after their heavy sales of Rs 1764 crore in the previous two trading sessions, from 9 February to 12 February. FIIs were net buyers to the tune of Rs 129 crore in index-based futures on 13 February.

In the cash segment, FIIs were net sellers of equities worth Rs 385 crore on 13 February 2007, as per provisional figures.

Asian markets edged higher on Wednesday, tracking overnight gains in US stocks. Key benchmark indices in Hong Kong, Japan, South Korea, Singapore and Taiwan were up between 0.5 - 1.4%.

US stocks jumped on Tuesday, led by gains in the Dow industrials as talk that aluminum maker Alcoa Inc may become a takeover target bolstered optimism about deals and energy shares gained with a sharp rebound in oil prices. The Dow Jones industrial average climbed 102.30 points, or 0.81%, to end at 12,654.85. The Standard & Poor's 500 Index shot up 10.89 points, or 0.76%, to finish at 1,444.26. The Nasdaq Composite Index rose 9.50 points, or 0.39%, to close at 2,459.88.

US crude shed 19 cents to $58.87 a barrel on Wednesday after rising above $59 overnight as the International Energy Agency raised its 2007 demand forecast and said it expected oil market fundamentals to tighten.