SENSEX today resumed its journey in the FY 2007-08 in absolute horrific manner. It lost about 300 points within few minutes of days opening.

Backdrop was prepared last Friday, when RBI announced its recent monetary tightening policy after Friday’s market-close. Cash Reserve Ratio (CRR) was hiked by 50 basis point from existing 6% to 6.5%. REPO rate was increased by 25 basis points and interest payment on CRR balance has been cut to 0.5% from previously 1%.

This tightening effort is no out of blues. Inflation numbers are pretty annoying. Last week, inflation was recoded at 6.46%, same as the number recorded for the week ended on 23rd March’2007. When RBI confirmed, 5 to 5.5% as inflationary comfort zone for economy, consistent steadiness in price growth is quite disturbing. Besides, countrywide harvest season is just on the threshold. Speculative hoarding of harvested crop may worsen the price situation. And these factors are contributing behind the rate hike.

This tightening will be like a double-whammy for the economy. Firstly, it will increase borrowing cost across the segments; secondly, resultant poor credit demand will hit banking companies’ profitability.

Few banks have already increased their prime-lending rate and others are on the way to increase. Majors like ICICI Bank have already increased their lending rate by as much as 1%, across the board. This will hamper credit demand for housing, automobile and consumer durables severely. And obviously banking companies, auto manufacturers and real estate developers will see their survival getting tougher in coming days, if the situation persists.

Via: Zee News