The stock market took a beating on Tuesday following Reserve Bank of India’s surprise decision to hike short-term borrowing and lending rates by 50 bps. According to a data available with Bloomberg and Reserve Bank of India, this was the eighth time in the 11 years when the central bank took such a hard step.

An FCRB analysis revealed the impact of 50 bps hike in the policy rate on markets over the previous seven occasions.

In five out of seven past instances Sensex was battered, but it recovered and remained positive in four out of seven occasions in a month after the announcements. However, over the next three months, it remained lower in six out of seven cases.

The BSE benchmark Sensex tanked 353.07 points, or 1.87 per cent, to close at 18,518.22.

Before this, RBI had raised rates by similar basis points on May 3. Sensex had lost 2.44 per cent on the day of announcement. The 30-pack index declined modestly 0.85 per cent during the month after the announcement and till Tuesday it has so far remained flat.

On June 29, 2008 when RBI raised repo rate to 9 per cent from 8.5 per cent, Sensex witnessed a free fall and registered a 3.89 per cent fall on that day. After a month of announcement, the index recovered fully and was up 5.60 per cent.

amitmudgill@mydigitalfc.com