Soon after the announcement, the BSE Sensex crashed 600 points, while the rupee slumped sharply to 62.61 per dollar as many business leaders said they were deeply disappointed with the continuing hawkish stance of the RBI.
The Sensex eventually settled 1.85 percent or 382.93 points lower at 20,263.71 on Friday while the NSE Nifty closed at 1.69 percent or 103.45 points lower at 6,012.10.
The move by RBI Governor Raghuram Rajan on his maiden policy review after taking office on Sept 4, along with the scaling back of some emergency measures to support the ailing rupee, surprised economists and markets alike.
While Rajan raised the RBI's policy repo rate by 25 basis points (bps) to 7.50 percent he however reduced the marginal standing facility (MSF) rate by 75 bps, causing Indian federal bonds, the rupee and stocks to all extended losses.
However, the cash reserve ratio or the amount of money banks have to park with the RBI, was kept unchanged at 4 percent.
"The need to anchor inflation and inflation expectations has to be set against the fragile state of the industrial sector and urban demand," Rajan said in his policy statement.
India's biggest lender State Bank of India chairman Pratip Chaudhuri said deposit and lending rates will go up post RBI policy disappointing consumers who are struggling under the burden of EMIs.
"Unsurprisingly, the forex market's first reaction has been negative. Higher interest rates have negative implications for growth and equities, both of which are key drivers of the Indian rupee," Standard Chartered said in a note.
Industry lobbies too expressed surprise and disappointment at the moves as the CII said Rajan should have focused on growth and the CREDAI said the step igonred the focus on the industry growth.
CREDAI - National President C Sekhara Reddy said," In these challenging times RBI decision to raise the repo rates by 25 bps is tougher than expected and could have been avoided.
"In the coming months we hope the Bankers will come out with special schemes to attract the home buyers.
"That RBI should formulate a special policy for the housing industry with a focus on affordable housing. We hope that RBI will take cognizance of the industry requirement and will announce a rate cut, which will provide the needed trigger and encouragement to the sector.
FICCI president Naina Lal Kidwai said "High interest rate has been identified as a major barrier to boosting growth... Entrepreneurs are holding on to their investment plans pending any relaxation in monetary policy by the RBI"
In a media release Srei Infrastructure Finance Limited said, "...The industry will have to take the brunt of this rate hike, especially the infrastructure sector which is quite stressed at the moment."
"Industry is truly concerned about the policy rate hikes and their adverse impact on the investment sentiment...It is difficult to foresee how private sector will be able to mobilize resources from domestic sources in this scenario," it added.
Tata Chemicals Executive Director and CFO P K Ghose said, "The main area of concern for the industry is the external sector which will remain volatile due to oil prices and reduced demand from global markets."
"For manufacturing to recover appreciably, the government needs to address structural issues in the economy. Some steps have been taken in the recent past and hopefully we will see their impact soon," he added.
--IBNS (Posted on 21-09-2013)