The RBI move perhaps has changed the financial landscape quite significantly. All markets will react on Monday, but there is considerable surprise at what the RBI has done, in changing the CRR and the repo rate.

It is very bad news for markets. It is almost certain that stock markets and bond markets will both sell off on Monday morning. Being led by the rate sensitive sectors, Markets are in for a blood bath on Monday morning because this has come as a surprise, particularly because the markets were expecting that rates might actually start cooling down in the end of April as inflation cools down but the RBI has not even waited for its monetary policy meeting.

Credit growth:

While the market is obsessing about WPI number, the RBI is going around quite ruthlessly about cooling credit growth. It is still seeing that credit growth is dangerously close to 30%, it wants to cool that and unless that happens, it will not take the foot of the pedal which is why brakes are coming down hard.

The timing might be a surprising on why RBI has chosen to do it now and one wonders whether there is a bit of political element because just two days back the Finance Minister who has typically been resisting rate hikes, has been sort of paving the way for it.. Its bad news every way you look at it but the market will have to deal with it.

Banking sector:

Bank rates will go up as banks really do not have a choice. They will almost certainly raise rates. Banking sector shares will be sold off because (a) credit growth will slowdown which is their topline (b) because of this CRR changes margins will be hit (c) now bond yields will move up which means treasury losses will also mount.

The only defense for the banking sector is that valuations are very attractive for many of the PSU bank. Fundamentally too banks will struggle over the next one-year with what is happening in the system. Its bad news for the banking system, both from a stock market and from an operation’s point of view.

Rate sensitive sectors:

A whole lot of rate sensitive sectors will do very badly now. Rates are very high in the system if you just look at home loans, consumer loans, auto loans etc.

These are all sectors which are extremely important to the economy and to the stock market and they will all get hit because growth will slowdown, that is what the RBI is trying to do. RBI is trying to curtail loan growth, consumption growth and demand growth. So autos will be hit, property stocks will be hit once again because real estate is something, which the RBI is almost directly targeting. So real estate and construction both will get hit.

Corporate sector:

The impact will be felt when companies starts borrowing at very high rates.