Surprise repo rate, CRR hike to hit market

The market is likely to slide today following a surprise hike in short term interest rate and CRR announced by RBI after trading hours on Friday 30 March. The RBI move comes at a time when there is already uncertainty about market’s direction.

Soon after the RBI announcement, the top private sector bank ICICI Bank on Saturday 31 March 2007 raised its benchmark lending rate by 100 basis points to 15.75%. A hike in lending rate by banks will raise interest rates on working loans of corporates. Over the last year, Indian bank lending rates have risen by about 300 basis points

Reserve Bank of India (RBI) raised its short-term lending rate, the repo rate, by 25 basis points to 7.75%. It also raised its 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. The CRR hike will drain Rs 15500 crore from the banking system. "In the light of the current macroeconomic, monetary and anticipated liquidity conditions, as well as with a view to containing inflation expectations, it is critical to take demonstrable and determined action on an urgent basis," RBI said in a statement.

The stock exchanges have clubbed settlement of Friday (30 March)’s trading with today’s trading. Therefore, brokers have advised clients not to sell shares today which they had bought on Friday (30 March).

As per provisional data, FIIs were net buyers to the tune of Rs 640 crore on Friday (30 March), the day when Sensex had risen 92 points ahead of RBI’s announcement of hike in repo rate and CRR.

Asian stocks edged higher on Monday (2 April 2007). Key benchmark indices in Hong Kong, Japan, South Korea, Singapore, China and Taiwan were up by between 0.5% to 1.3%.

US stocks ended little changed on Friday (30 March) as word the United States had imposed duties on some Chinese imports offset strong economic news and a pullback in oil prices. The Dow Jones industrial average finished up 5.60 points, or 0.05 percent, at 12,354.35. The Standard & Poor's 500 Index slipped 1.67 points, or 0.12 percent, to 1,420.86. The Nasdaq Composite Index inched up 3.76 points, or 0.16 percent, to close at 2,421.64

Oil prices eased but held just under $66 a barrel following a near two-week rally on tensions over Iran's capture of British military personnel and worries over US gasoline supplies ahead of summer driving season.

The near term major trigger for the market is Infosys’ guidance for FY 2008 (year ending 31 March 2008). Infosys will unveil its FY 2008 guidance along with its Q4 March 2007 results on 13 April 2007. In a recent pre-guidance report on Infosys, Merrill Lynch has given short term sell on Infosys as its expects a conservative guidance by Infosys due to uncertain US economic outlook, rupee appreciation versus dollar and client specific issues. It expects Infosys to give EPS growth guidance in early 20s