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The markets are trading higher with hefty gains on account of Repo and Reverse Repo remained unchanged by RBI in the new Credit Policy. However, RBI has hiked CRR by 25 bps to 8.25%. Nifty has surged above 5,000 mark and is hovering around that level. On the sectoral front, IT, realty, banking, metal indices trading with hefty gains. The BSE mid-cap and small cap indices were trading with moderate gains, each up nearly 1%.

Jim Walker of CLSA is surprised by the RBI’s decision to raise the CRR. He is expecting another round of rate hike on the lending front. The RBI move is unlikely to restrict the economy, he told CNBC-TV18. He is looking at a GDP growth of 7.5-8.5% for FY09. The Indian banks are not much exposed to US-structured products, he feels.

Nilesh Shah, Deputy MD, ICICI Prudential said, “I think the RBI has probably kept as in a limbo. The CRR hike will certainly put pressure on the bank’s ability to price their lending’s and since they haven’t been revised for almost 75 bps hike probably there is a need to tinker around a little. However since the repo and the reverse repo have been kept unchanged maybe some banks will probably take a call based on their asset liability mismatch- that there is no need for revision. So it’s not going to be a consensus decision some banks may raise interest rates; some banks might decide not to raise interest rates.”

Shah added, “ On the equity side, my feeling is that because the markets have run up and there is retail participation which always comes in a rising market I think they will focus much more now on the results and the actual monsoon rather than the monetary policy or the interest rate movement. So from a stock market point of view the focus is more on the other factors rather than the monetary policy interest rates or tightening. I think that pressure will be away from the stock market.”

Commenting on the likely reaction from the markets, Walker said, "Sometimes markets don’t quite get it right. This is if anything, an even bigger tightening move by the RBI than if they had just moved the repo rate. There is really no need for banks to necessarily follow the repo rate higher. But when you remove liquidity directly form the system, it is almost inevitable that the buying will push up their lending rates and that’s certainly been the case over the last couple of years - as the cash reserve ratio has increased, the banks of almost in every occasion pushed the rates higher and I think we will see that again. The markets might be relieved but I think when they think about it, that relief will turn to a wee bit of dismay that the RBI continues to be the really watchdog of inflation in India.”

Tushar Poddar, Goldman Sachs feels that the RBI’s tightening bias will continue in the near term, possibly through further CRR hikes. The current CRR hike and prospects for more will be negative for banks as it would hurt their margins. He expects banks to increase lending rates gradually due to a cumulative 75-bp increase in the CRR. Poddar added that he expects FY09 growth to slow to 7.8% while inflation to be at an average of 6.5% over the next six months and gradually coming down to 5% by end-March 2009. He continues to expect the Indian Rupee to appreciate by 4% against the US Dollar in FY09.

Source: Moneycontrol.com