Sensex sheds 216 points on hike interest rate

The market staged a recovery from Monday’s steep fall that was caused by RBI’s surprise hike in short term interest rate and cash reserve ratio announced after the markets had closed on Friday 30 March 2007. Firm global markets and cooling off oil prices aided the recovery from lower level in the short trading week.

But the market ended the week in the red. The 30-share BSE Sensex lost 216.02 points or 1.6% to 12856.08 in the week ended Thursday 4 April 2007. The S&P CNX Nifty shed 69.55 points or 1.8% to 3752 in the week.

BSE Mid-Cap index lost 64.17 points or 1.1% to 5319.95 whereas BSE Small-Cap index lost 14.14 points or 0.2% to 6456.37 in the week.

A surprise hike in the repo rate and the cash reserve ratio (CRR) announced by the Reserve Bank of India (RBI) after trading hours on Friday (30 March 2007) spooked the bourses on Monday (2 April). The Sensex plunged 616.73 points (4.72%), to settle at 12,455.37. Bank and auto shares led the sharp fall on the day. Sensex’s intra-day fall of 646.58 points on that day was its biggest intra-day point fall since 28 February 2007.

The latest rate hike reignited concerns that economic growth will slowdown due to sustained rate rises. The RBI raised its short-term lending rate, the repo rate, by 25 basis points to 7.75%. The central bank also raised the cash reserve ratio (CRR) by half a percentage point. The CRR will rise to 6.50% in two tranches, the first on 14 April 2007 and the other on 28 April 2007, and will drain Rs 15500 crore from the banking system.

The market recovered on Tuesday (3 April) taking support from steady to firm Asian and European bourses. Sensex jumped 170 points. All sectoral indices on BSE settled with gains, and shares from the IT sector led the uptrend on that day.

The market extended its recovery on Wednesday (4 April) tracking firm Asian stocks. Sensex added 162 points. Asian stocks extended their rally on Wednesday, with Australia, Singapore and South Korea hitting record highs, inspired by a reassuring US housing data and falling oil prices.

The recovery continued on Friday (5 April) when the barometer index Sensex advanced 69 points. Buying in metal, banking and cement sectors lifted the bourses on that day. The market remains closed on Friday (6 April) on account of Good Friday.

Foreign institutional investors (FIIs) were in selling mode. They pressed sales worth a net Rs 643.40 crore in two trading sessions between Monday and Tuesday. Mutual funds were net buyers to the tune of Rs 63.30 crore on Monday. On Tuesday, they pressed sales worth a net Rs 105 crore.

Shares of two-wheeler makers slipped following disappointing sales for the month just gone by. Hero Honda shed 7.6% to Rs 632.45 in the week.

Cement shares recovered from lower level as cement producers did not cut cement prices despite the government abolishing import duties. The government late on Tuesday (3 April) abolished the 16% countervailing duty (CVD) and an additional 4% customs duty on portland cement. It may be recalled that in late-January 2007, the government had already abolished 12.5% basic import duty on cement.

IT bellwether Infosys witnessed alternate bouts of buying and selling. Infosys’ FY 2008, which it will unveil along with Q4 March 2007 results, on 13 April 2007, is the next major trigger for the market. In a recent pre-guidance report on Infosys, Merrill Lynch placed a short-term 'sell' on the Sensex heavyweight, expecting a conservative guidance from the company due to an uncertain US economic outlook, the appreciation of the rupee versus the dollar and other client-specific issues. Merill Lynch expects Infosys to give an EPS growth guidance in the early 20s.

Bank shares recovered during the latter part of the week after Monday’s steel fall caused by RBI’s surprise rate hike. The rise in lending rates is expected to slowdown loan growth which has been running at about 30%. ICICI Bank raised its benchmark lending rate by 100 basis points to 15.75%, effective 1 April 2007. ICICI Bank also raised its floating reference rate for consumer loans, including home loans, by 100 basis points to 12.75%. Yes Bank raised its prime lending rate by 75 basis points, to 14.75%.

Tata Steel surged after the company on Monday reported strong sales and production for FY 2007. The scrip rose 3.4% to Rs 465.20 in the week. Tata Steel’s sales in FY 2007 were record-breaking for both flat and long products.

PSU power equipment major Bhel witnessed renewed buying after the company during trading hours on Tuesday reported 42% growth in provisional net profit for FY 2007. Bhel's net profit rose 42% to Rs 2385 crore in FY 2007 (year ended 31 March 2007) from Rs 1679 crore in FY 2006. Turnover rose 28.7% to Rs 18702 crore from Rs 14525 crore in the year ago period.

Metal prices Sterlite Industries, Hindustan Zinc and Hindalco recovered tracking rally in metal prices on the London Metal Exchange (LME).

The market regulator Securities & Exchange Board of India proposed applying circuit filter on the day of relisting in a scrip. Sebi has proposed that 20% price band would be levied on commencement/re-commencement of trading in a scrip which would include all the cases of commencement/ re-commencement of trading due to de-merger, amalgamation, capital reduction, scheme of arrangements, revocation of suspension, etc. as decided by the exchanges from time to time.

On Wednesday, Sebi banned 28 stock broking firms and eight individuals from trading in shares for five years for their role in the Ketan Parekh securities scam. These entities have also been debarred from accessing capital market and associating with any intermediary in capital market for five years.

The empowered group of ministers (GoM) on special economic zones (SEZs) on Thursday cleared 83 proposals, and capped the maximum area of an SEZ at 5,000 hectares. The maximum area is for multi-product zones, and the state governments can prescribe a lower limit if needed. GoM has also decided to lift the freeze on approving new special economic zones. It may be recalled that the GoM at its last meeting in January 2007 put a freeze on fresh notifications and approvals due to widespread protests against land acquisition for SEZs, especially at Nandigram in West Bengal.

China's central bank has ordered commercial banks to set aside money as reserves for the sixth time in 10 months, in an aim to further control liquidity and curb lending. The bank raised the reserve ratio by another 0.5 percentage point to 10.5 percent, effective from April 16, the People's Bank of China said on Thursday.

On the same day, Bank of England held British interest rates steady at 5.25 percent.