MUMBAI: All eyes were on the new Reserve Bank of India governor Raghuram Rajan and his first monetary policy review two days after his US counterpart, Federal Reserve chairman Ben Bernanke, on Wednesday sprung a very pleasant surprise on global markets by not rolling back the Fed's stimulus package. An overwhelming majority of economists and market analysts forecast Rajan wouldn't touch interest rates; a hopeful minority ventured he would cut rates to boost consumer demand and economic growth.
It was his turn to spring a surprise on Friday, and not a pleasant one as far as the markets were concerned. He raised the key policy rate—for the first time since October 2011—from 7.25% to 7.5%. (Also known as the repo rate, it is the rate at which the RBI lends to banks.) It sent the rupee and the sensex into reverse gear again, ending the stunning run they'd enjoyed in the past few days—ironically enough, in large following Rajan's move to Mint Street.
The sensex fell by over 600 points within minutes of the policy being announced on fears that a growth-starved economy might turn unattractive for foreigners. Fearing a drying-up of dollar inflows, the rupee also closed 50 paise lower at 62.28. However, with FIIs resuming purchases later in the day, the sensex recovered somewhat to close 383 points lower at 20,264.