Key stock indices such as Nifty50, Nifty Bank and auto declined up to 0.79 percent after the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) raised the inflation target for financial year 2023-24.

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The RBI monetary policy panel on Thursday decided to keep the key policy repo rate unchanged at 6.5 percent.

However, a sharp increase in food prices in recent months led the central bank to revise its consumer inflation forecast for FY24 to 5.4 percent against 5.1 percent earlier.

“A substantial increase in headline inflation would occur in the near term… Uncertainties remain on the domestic food price outlook,” RBI Governor Shaktikanta Das said.

While RBI's stance on policy repo rate was on the expected lines, the central bank’s decision to impose an incremental Cash Reserve Ratio (CRR) of 10 percent of NDTL on banks dampened market sentiment.

The move may suck out more than Rs 1 lakh crore from the banking system.

"Imposition of Incremental CRR (ICRR) of 10 percent on NDTL (for period of May 19 to July 28 ) would imply a temporary liquidity depletion of Rs 1.15 lakh crore/Rs 99,600 crore (ex of HDFC twin merger). This assumes an effective CRR of 14.5 percent for the period concerned (4.5 percent+10 percent)," said Emkay Chief Economist Madhavi Arora.

"However, if we assume the ICRR of 10 percent to include the existing CRR of 4.5 percent, the liquidity depletion would amount to Rs 65000 crore/Rs 54800 crore ex of HDFC twin merger. We await clarity on RBI’s assessment of ICRR in the press conference. But we believe it has to be the former (i.e 14.5 percent effective CRR)," Arora said.

CRISIL Chief Economist Dharmakirti Joshi said the introduction of incremental cash reserve ratio could temporarily harden short-term rates.

Commenting on RBI’s decision, Upasna Bhardwaj Senior Economist at Kotak Mahindra Bank told CNBC-TV 18, “I think higher for longer is what the governor did emphasise maybe in the global context, but that also remains the key even domestically. We do not look at a possibility of a rate cutting cycle happening anytime this financial year.”

"RBI is not ruling out hikes if necessary, clearly cuts are out of sight," said Anitha Rangan, Economist at Equirus.

After the policy announcement by RBI governor Shaktikanta Das, the benchmark Nifty50 declined around 0.34 percent to hit a low of 19,495 as rate sensitive consumer goods, FMCG, auto and banking shares dropped.

The Nifty Bank index declined 0.79 percent to 44,527.10 with ICICI Bank, Kotak Bank, Axis Bank and HDFC Bank emerging as leading losers.

Nifty Auto dropped by 0.45 percent to 15,416.40, Nifty FMCG by 0.78 percent to 51,799.00and Nifty Consumer Durables by 0.76 percent to 27,663.05.

First Published:Aug 10, 2023 12:13 PM IST