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After expressing concerns last week about the Indian stock market hitting record highs, the Bombay Stock Exchange (BSE) lost almost 800 points or 5.66% in the next four trading sessions after the Reserve Bank of India (RBI) decided to raise the cash reserve ratio to curtail inflation and reign in excess liquidity. The RBI asked banks to increase the cash reserve ratio by 50 basis points to 5.5%, leading to a drop of 7.43% in the ADRs of India’s leading bank ICICI Bank (IBN) and a drop of 5.85% in HDFC Bank (HDB) over three trading sessions.
Both these banks and the BSE have recovered most of these losses and the market seems to have shrugged off this event just like it shrugged off the Mumbai train attacks in July. I have been following both these banks for quite some time now but decided to stay away as the model portfolio already has enough exposure to India through Tata Motors (TTM) and Sify (SIFY) and as a general rule of thumb it is not a good idea to invest in banks in a rising interest rate environment.