The Reserve Bank raised its lending rate to banks by 0.25%, to 5.50%, on Wednesday, 7 October, with retail inflation at 4.82% and oil near $100. The Nifty 50 fell 173 points, or 0.76%, and ended the session at 22,603.05.
That is the first rate rise in India since February 2023.
Start with the EMI
Take an example. A home loan of ₹50 lakh for 20 years, linked to the repo rate, at 8.25% has an EMI of ₹42,603. If the bank passes on the full 0.25%, the rate becomes 8.50% and the EMI becomes ₹43,391.
That is ₹788 more every month. Over 240 months it adds up to about ₹1.89 lakh.
The repo rate is the price at which the Reserve Bank lends to banks. When that price goes up, the bank's own cost of money goes up, and some of it reaches your EMI.
What the Reserve Bank did
All six members of the Monetary Policy Committee voted for the rise. The rate moved from 5.25% to 5.50%. The committee changed its stance from neutral to "calibrated tightening".
The Reserve Bank raised its own estimate of inflation for this financial year from 5.0% to 5.2%. It raised its estimate of growth from 6.7% to 7.1%. Retail inflation for August was 4.82%, up from 4.45% in July. Food inflation was 5.95%, up from 5.52%. Retail inflation has now risen for two months in a row and sits above the 4% target.
What the market did
Nifty 50 opened at 22,690 and touched 22,546 during the day. It closed at 22,603, 57 points above the day's low. Touching a number and closing at it are two different things. The close is the one that is recorded.
Sensex fell 429 points, or 0.59%, to 72,639.
Of the 50 companies in Nifty 50, 41 fell and 9 rose.
Of the same 50, 42 now close below their average price of the last 200 sessions and 8 close above it. Nifty itself closed 7% below its own 200-session average of 24,301.
Foreign investors sold shares worth ₹6,121 crore in the cash market on Wednesday. Indian institutions such as mutual funds bought ₹4,597 crore. These are provisional figures. In the four sessions of October so far, foreign investors have sold ₹23,266 crore and Indian institutions have bought ₹24,909 crore.
Metal companies fell the most. Nifty Metal lost 2.35%. Nifty Auto lost 1.58% and Nifty IT lost 1.34%. Public sector banks went the other way: Nifty PSU Bank rose 1%.
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OIL
Brent crude was near $102 a barrel on Wednesday, up from $98.67 at Tuesday's settlement. That is 53% higher than twelve months ago. The reason is the Strait of Hormuz. This week there were reported Houthi attacks on Saudi facilities and Iranian incidents in the strait, while Saudi Arabia restored its East-West pipeline to 5.8 million barrels a day.
India buys most of its oil from abroad. When oil costs more, diesel, freight and cooking gas follow, and that shows up in the price number the Reserve Bank watches.
GOLD AND SILVER
Gold in New York was near $4,150 an ounce on Wednesday. On 28 January it reached about $5,590. It is now about 26% below that day. On MCX in the evening, the December gold contract was at ₹1,48,782 for 10 grams, down 0.89% from Tuesday. December silver was at ₹2,23,210 a kilo, down 1.77%.
In September, gold fell more than 8% in dollars, while investors added more than 70 tonnes to gold funds around the world. Traders in gold futures sold. Long-term fund buyers bought. Both happened in the same month.
RUPEE
The rupee closed at 96.86 to the dollar on Wednesday, 43 paise weaker than Tuesday. A weaker rupee means every barrel of oil costs India more in rupees, even when the dollar price stands still.
INDIA'S PRICE NUMBER
Retail inflation was 4.82% in August and 4.45% in July. The target is 4%. This is the number the Reserve Bank answered on Wednesday.
WORLD MARKETS
In New York on Tuesday, the S&P 500 closed at a record 7,818.93, up 0.58%. The Nasdaq rose 0.45% and the Dow rose 0.49%. The US central bank raised its own rate by 0.25% on 16 September, to between 3.75% and 4%. It was the first US rise since 2023.
MONEY LENT TO GOVERNMENTS
The US government paid 5.275% a year to borrow for ten years on Tuesday. In mid-September that rate went above 5% for the first time since 2023. When a ten-year loan to the US government pays more than 5%, shares and gold have to compete with that for every dollar.
THE WEEK AHEAD
The minutes of the US central bank's September meeting are published at 11.30 pm India time on Wednesday 7 October. India's retail inflation number for September is scheduled for Monday 12 October. October futures and options in Nifty expire on Tuesday 27 October.
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The repo rate is the price of money. On Wednesday that price went up for the first time since February 2023.
It reaches you through the EMI first. It reached the market the same afternoon.