While the Reserve Bank of India's (RBI) move to raise key interest rates by 25 basis points came well after the markets were closed here on Friday, global investors got a chance to react to the Indian central bank's surprise decision.
Indian companies’ American Depositary Receipts (ADRs) fell the most in six weeks. The Bank of New York Mellon India ADR Index dropped 1.8% to 1,098.49 by 4 p.m. New York time. ICICI Bank's ADR was down nearly 4%. ADRs of Infosys and Tata Motors were down 1.7% and 1.4%, respectively.
Global commodities and stocks slumped while the dollar and the yen rose against most major counterparts following the RBI's unexpected hike in interest rates. Crude oil and copper fell, with crude futures dropping as low as US$79.86 a barrel in New York.
US stocks declined, ending an eight-day winning streak for the Dow average. The Stoxx Europe 600 Index slipped 0.4% to 260.16 and Brazil’s Bovespa stock index fell 1.3% for a third straight decline.
Emerging market stocks fell and emerging market currencies weakened after the RBI announcement. The MSCI Emerging Markets Index fell 0.4% to 997.94 at 5:00 p.m. in New York. Russia’s Micex Index declined the most in four days.
Exchange traded funds (ETFs), tracking Indian stocks and the so-called BRIC group, declined in US trading late on Friday after the RBI stunned investors by hiking the repo rate and the reverse repo rate by 25 basis points.
The largest exchange traded fund for Indian stocks is the iPath MSCI India Index ETN, an exchange-traded note issued by Barclays with more than US$1bn in assets. Another India centric ETF, WisdomTree India Earnings Fund holds more than US$800mn in assets.
The iPath MSCI India Index ETN lost more than 1% in afternoon trade on Friday.
Separately, exchange traded products tied to the Indian rupee's movements versus the US dollar advanced.
IUndian currency funds, including Market Vectors Indian Rupee/USD ETN and WisdomTree Dreyfus Indian Rupee Fund gained after the rate hike news.
The RBI increased the benchmark reverse repurchase rate to 3.5% from a record-low 3.25% and the repurchase rate to 5% from 4.75%. The surprise decision comes a month before the bank’s scheduled monetary policy meeting.
India’s central bank raised rates for the first time since July 2008 after inflation accelerated to a 16-month high. The decision stoked concerns about the outlook for the global economic growth.
RBI chief D. Subbarao moved on policy rates after India’s industrial production grew by 16.7% in January following a 17.6% gain in December, the fastest pace since at least 1994. The WPI inflation touched 9.89% in February, according to the commerce ministry.
Indian markets will start with a gap-down on Monday. Banks, Autos and Real Estate stocks will be the worst hit. The RBI move will impact short-term bonds and yields on benchmark 10-year government bonds may cross 8% again.
The central bank may raise interest rates again next month in what many experts see a series of measured increase in borrowing costs through the remainder of the year to contain spiraling inflation even as the economy remains on a firm footing.