Shares fall, bond yields rise and rupee strengthens

Indian shares fell to their lowest in two months and benchmark bond yields rose to their highest since 2019 on Wednesday, after the Reserve Bank of India raised the key lending rate by 40 basis points in an unscheduled meeting, citing persistent inflationary pressures in Asia's No. 3 economy.

“Almost no one at all was prepared for an inter-meeting action,” said Suyash Choudhary, Head – Fixed Income, IDFC AMC. The bank’s next scheduled rate decision isn’t until June 8.

“The evolution of RBI assessment since February now constitutes a full about-turn. This is somewhat understandable given the extraordinary events that have since transpired. The intense geopolitical escalations have put massive upward pressure on a host of commodities, thereby throwing expected inflation trajectories into chaos,” Choudhary elaborated.

Also Read: Key takeaways from RBI Governor's address

RBI’s move coincided with the opening of the Life Insurance Corporation of India’s initial public offering to retail investors and came just hours before a monetary policy meeting of the US Federal Reserve, which has also hinted at aggressive interest rate hikes.

RBI’s “proactive move is justified from the perspective of inflation management, but the timing leaves a lot to be desired. The above 1000 point crash in Sensex has soured the sentiments on the opening day of India's largest IPO. The 10-year bond yield has spiked to above 7.39 per cent indicating an imminent rise in the cost of funds," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Yields on the benchmark 10-year bond jumped as much as 30 basis points to 7.42 per cent, the highest since 2019. The rupee was up 0.1 per cent, the second-best performer in Asia for the day, as the higher rates lent the currency some additional support, according to Bloomberg.

Also Read: Inflationary pressures likely to continue going forward on geopolitical tensions: Shaktikanta Das

RBI’s monetary policy committee (MPC) unanimously voted to increase the repo rate by 40 bps to 4.40 per cent with immediate effect. It also slashed the cash reserve ratio (CRR) by 50 basis points to 4.50 per cent beginning from May 21, 2022, adding that the "CRR hike can suck out liquidity to the tune of Rs 83,711.55 crore". The cash reserve ratio (CRR) is the percentage of a bank's total deposits that it needs to maintain as liquid cash.

“Heightened uncertainty surrounds the inflation trajectory, which is heavily contingent upon the evolving geopolitical situation,” RBI Governor Shaktikanta Das said on Wednesday.

Russia's invasion of Ukraine has thrown the global supply chain into disarray, boosting fuel, food and fertiliser prices across the globe. Das also raised concerns about crop-related problems elsewhere, export restrictions by key producers and high crude oil prices.

Retail inflation soared to a 17-month high of 6.95 per cent in March, government data showed.

“Core inflation is likely to remain elevated in the coming months,” Das warned.