Stock Markets Fall as RBI Ups Bank Rate to 10.25%

Indian (SENSEX) stocks tumbled the most in two weeks after the Reserve Bank of India raised two interest rates on 15 July, stepping up efforts to aid the rupee after its plunge to a record low.

The central bank increased the marginal standing facility and the bank rate to 10.25 percent from 8.25 percent, and said it plans to sell $2 billion of government bonds on July 18, moves that worsen a tightening in liquidity across most of the biggest emerging markets. The rupee has weakened 8.2 percent against the dollar this year, hurt by the slowest economic growth in a decade and a record current-account deficit.

The tightening “will be negative for the equity markets in the near-term as the market was looking for easy monetary policy going forward,” Hemant Kanawala, head of equities at Kotak Mahindra Old Mutual Life Insurance Ltd., which has $2 billion in assets, said in an interview. “The currency is one of the main concerns of the RBI.”

The rupee’s plunge threatens to spur gains in consumer prices and prompted Reserve Bank of India Governor Subbarao to leave interest rates unchanged in June for the first time in four reviews, citing inflation risks. The RBI meets for its next policy review on July 30.