RBI action spooks mkts, Sensex closes down 167 pts

The benchmark Nifty reacted negatively to the unexpected hike in key rates and closed the session sharply lower. India's central bank, the Reserve Bank of India increased repo and reverse repo rates by 25 bps each to 5% and 3.5%, respectively on Friday after the market hours.

The central bank has pointed out that food prices, despite some moderation in the last few weeks remain at an elevated 16%; the consumer price indices have been rising in recent months. Inflation, which touched 9.89% in February, is projected to touch double-digit level next month. The second reason for the hike is the robust recovery numbers. Industrial output grew at 17.6% in December and at 16.7% in January. In addition a 39% rise in capital goods in December and a 56% rise in January show that investment activity has revived.

This was on expected lines, expert say but did not expect too early. Nandan Chakraborty of Enam said the RBI has unexpectedly raised rates ahead of the scheduled policy meet. "The quantum of hike has been on the expected lines hence the markets are likely to settle down after the initial reaction."

Rajeev Malik of Macquarie Capital Securities sees a 25-50 bps hike in the April policy. ''Another 25 bps repo, reverse repo hike in April is likely along with a 25-50 bps move on cash reserve ratio (CRR),'' said Malik, adding that a cumulative rate hike of 100-125 bps is seen though 2010.

The markets almost recovered in the middle of the day after that initial reaction, but slipped again especially after weak European cues. CAC, DAX and FTSE were down 1% each and the US index futures lost 0.4% each, at the time of closing India equities.

Asian markets also ended lower on the back of IMF debt warning and weakness in commodities. Hang Seng slipped 2%. Jakarta, Kospi, Straits Times and Taiwan lost 0.8-1.5% while Shanghai gained 0.22%. Japan's Nikkei was shut today.