MUMBAI: Banks, real estate and automobile shares could lead the stock market lower on Monday, after the Reserve Bank of India (RBI) raised interest rates sooner than expected to combat inflation.
With the Reserve Bank of India expected to go in for another increase in policy rates during its upcoming review on July 27, the market undertone is cautious, as investors fear these rate hikes may hamper economic growth. Weak global markets last week may also contribute to the subdued mood in the market.
Trading is seen light on Monday, as the nation-wide strike by opposition parties, protesting the recent fuel price hikes, would impact attendance in broking and investment houses. But market participants don’t expect any sharp fall throughout this week, unless the situation in European economies worsen.
“RBI had to make this move to curb inflation. So, it will be factored in after the initial shock,” said Jitendra Panda, assistant vice- president, Motilal Oswal Financial Services.
RBI on Friday evening raised the repo rate — the one at which banks borrow from the central bank — and the reverse repo — the rate at which the RBI absorbs money from banks — by 25 basis points each, after the wholesale price index inflation rose to 10.2% in May from 9.6% the previous month.
US markets fell on Friday, as the first decline in monthly non-farm payrolls this year for June and the biggest drop in factory orders in 14 months for May heightened fears of a slowing economic recovery.
“A run of weaker data has renewed investor concerns about the durability of the global recovery. We would caution against any substantive re-evaluation of the economic outlook, however,” said Barclays Capital, in its weekly note.
Back home, banks, real estate and auto shares could drop on concerns the rate hikes could dampen demand for loans, homes and vehicles.
Meanwhile, the boards of Reliance Power and Reliance Natural Resources (RNRL) on Sunday decided to fix the merger swap ratio at 1:4. The merger swap ratio is in line with the two companies’ market capitalisation, or the value of the total shares at ruling market price.
At Friday’s close, RNRL’s market capitalisation stood at Rs 10,394 crore, nearly one-fourth of that of R-Power’s Rs 41,979 crore.
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Reliance Power, RNRL merger ratio fixed at 1:4
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Src: ET, Smartinvestor, HDFC Sec