Sensex slips below 56,000, Nifty ends 2.3% down on RBI move; rupee gains

Mumbai: Indian equities slumped and bond yields shot up in response to the Reserve Bank of India's surprise interest rate increase on Wednesday. The Nifty fell below 17,000, while yields on benchmark government bonds soared to a three-year high as the timing of the central bank's monetary policy caught the markets off-guard, intensifying the risk-off sentiment.

The Nifty ended down 405.80 points, or 2.3%, at 16,663.30 and the Sensex closed 1,307 points, or 2.3%, lower at 55,669.03. This was the biggest one-day decline since March 7 and the fifth time this year indices have recorded a fall of over 2% in one day.

"The RBI had to increase rates at some point of time but the market has been surprised probably because investors had assumed that hikes will come in June-August," said Sanjeev Prasad, co-head, Kotak Institutional Equities. "The market has been surprised both on the quantum and the timing."

Analysts said the Nifty's fall below the crucial support of 16,800-mark has opened the likelihood of a sharper decline from the current levels.

In the bond market, yields on 10-year benchmark surged as much as 30 basis points to 7.42% on Wednesday after the monetary tightening by RBI. Purchases from a few state-owned banks, however, helped pare some of its early losses, before closing at 7.38%, a level seen before the pandemic first hit in March 2020. It is at a three-year high. The gauge closed at 7.12% Tuesday. Bond yields and prices move in opposite directions.

"The intermittent hike was a surprise to the markets, sending yields much higher," said Ashhish Vaidya, managing director at DBS Bank India. "The quantum of hike was larger than anticipated. Shorter duration yields reacted more adversely."

"Had the central bank been proactive, the yield curve would have been less steeper," he said.

Yield on four-year government bonds rose 50 basis points to 6.95% Wednesday, the highest since May 16, 2019, according to Bloomberg data.

"While banks are facing mark-to-market losses, the benchmark level is high enough for fresh purchases," said the chief dealer of a large public sector bank.

The stress in stocks and bonds did not rub off on the currency market partly on account of the offshore inflows related to LIC of India's initial public offer. The rupee gained about 0.30% to close at 76.42 a dollar.

"Any sharp rise in interest rates will potentially draw foreign portfolio investors in future as well," said Anindya Banejee, a currency analyst at Kotak Securities. "The currency found support from offshore inflows for the LIC IPO."

In equities, foreign portfolio investors sold to the tune of Rs 3,288.18 crore on Wednesday. Domestic Institutional Investors bought shares worth Rs 1,338 crore.

Beginning May, the rupee is the second best performing Asian currency after the Singapore dollar.

Money managers said the market's direction will depend on the US Federal Reserve's rate action and commentary on future rate hikes on Wednesday night.

Investors have been treading with caution amid worries that the American central bank might aggressively tighten monetary policy to contain inflation.

"A 50 basis point US Fed rate hike is priced in and we will have to look at their communication for future policy actions," said Prasad

The broader market also fell, with the Nifty Midcap 100 and the Nifty Smallcap 100 ending down over 2% each. The Volatility Index or VIX - a fear gauge - surged nearly 8% at 21.88, extending upsides for the third straight day.