This tuesday, May 3rd 2011, RBI Governor raised repo rate and savings rate by 50 bps. Banknifty had already moved 5% below its peak just in anticipation of this event. To some it might seem something as simple as RBI as having preponed July rate hike and clubbed it with April hike. So Banknifty should go down another 5%, right? Afterall, most industry analysts had anticipated three more 25 bps hikes in repo rate this year and priced it in Banknifty just couple of months back at current price levels. In fact Banknifty is already down another 5% as I write this post so probably we are done going down and its time to look up and see Banknifty making new highs. I happen to believe however that RBI’s action is likely to have an impact far in excess of that. Why?
Let me begin by saying that market price is a convergence of expectations of fundamentals. OK, another fundamental analyst you might say! As if we were already not drowning under combined weight of 2500 analysts espousing their views through 25 news channels and 25,000 web pages. Not really. I wrote .