Sensex slumps 353 points on sharp hike in RBI rates

Hit hard by higher-than-expected hike in RBI rates, the Bombay Stock Exchange (BSE) Sensex tumbled 353 points to 18,518 - biggest fall in five weeks - as investors sold across the board, especially realty, auto and banking segments that are impacted the most by the high interest regime.

In its first quarter review of the monetary policy for 2011-12, RBI hiked lending (repo) and borrowing (reverse repo) rates by 50 basis points, as against widely expected 25 bps.

The RBI move signalled continuation of the high interest rate regime to combat inflation by making loans costlier for business as well as consumers. It will hit corporate margins and curb demand, analysts said.

The Reserve Bank also revised its fiscal-end inflation projection to 7 per cent from 6 per cent earlier, making investors jittery, they added. In June it was 9.44 per cent.

The BSE 30-share barometer initially touched a high of 18,944.60 and traded in a narrow range. As RBI hiked the rates, it started falling and settled at 18,518.22, down 353.07 points or 1.87 per cent. In last two sessions, it had gained over 435 points or 2.36 per cent.

"The RBI policy turned out to be a huge dampener for the market sentiment. Corporates were already ruing the high cost of funds, resulting in their margin squeeze." said Shanu Goel senior research analyst at Bonanza Portfolio.

Motilal Oswal Securities Associate VP Parag Doctor said, "RBI unexpectedly hiked interest rate by 50 bps as against market expectation of 25 bps. Most of the interest sensitive sectors like banking, auto, realty and infrastructure stocks witnessed sharp declines."

Besides the rate hike, offloading long positions ahead of the expiry of July derivative contracts on Thursday aggravated the situation.