Markets slump reacting to the RBI governor's hawkish tone

Markets have slumped, losing considerable grounds in the early noon session, though there are small attempts of recovery but traders in a knee-jerk reaction to the policy announcements have gone on a selling spree, dragging both the indices lower by over a percent each. The central bank though cut the repo rate by 25 basis points but it seems to have already been factored in and traders were expecting a surprise again in form of 50 basis points cut in rates, as the RBI signaled a long pause on monsoon concern. The selling aggravated with the RBI’s caution on return of inflationary pressure, it said that inflation is expected to be pulled down by base effects till August but to start rising thereafter to about 6.0 per cent by January 2016 - slightly higher than the projections in April. It further added that strong food policy and management will be important to help keep inflation and inflationary expectations contained over the near term. Back on street, there is red across board, though the broader indices were slightly in better position than the benchmarks but they too were witnessing cuts of around a percent. On sectoral front all the rate sensitives that have been trading range bound since morning, banking, realty, auto along with FMCG metal and capital goods, have slumped deep in red.

The BSE Sensex is currently trading at 27490.23, down by 358.76 points or 1.29% after trading in a range of 27404.16 and 27902.53. There were just 2 stocks advancing against 28 stocks declining on the index.

The broader indices too were trading in red; the BSE Mid cap index was down by 0.78%, while Small cap index lost 0.86%.

The top losing sectoral indices on the BSE were Bankex down by 1.66%, Realty down by 1.51%, FMCG down by 1.46%, Metal down by 1.17% and PSU down by 1.09%, while there were no gainers.

The two gainers on the Sensex were Bharti Airtel up by 0.82% and GAIL India up by 0.01%. On the flip side, Hero MotoCorp down by 3.24%, HDFC down by 2.78%, ITC down by 2.42%, Wipro down by 1.99% and Axis Bank down by 1.89% were the top losers.

Meanwhile, Reserve Bank of India (RBI) not going by its usual surprise giving style came much in line to the street expectation in its Second Bi-monthly Monetary Policy Statement, 2015-16 and cut its policy rates by 0.25 basis points, making it the third policy easing this year. RBI lowered the repo rate to 7.25 percent from 7.50 percent, consequently the reverse repo rate under the LAF stood adjusted to 6.25 per cent from 6.50 per cent. However, RBI kept the reserve ratios of CRR and SLR unchanged at 4 per cent and 21.5 per cent respectively.

Talks of rate cut had gained momentum over the last couple of weeks and the markets had been anxiously waiting for a rate cut from the RBI. Though, the central bank announced a rate cut but it cautioned that Inflation is expected to rise to 6 per cent by January 2016 and said that strong food policy management is important to keep inflation and inflationary expectations under check in near term. Furthermore, it said that monetary easing can only create the enabling conditions for a fuller government policy thrust that hinges around a step up in public investment in several areas that can also crowd in private investment. This will be important to relieve supply constraints and aid disinflation over the medium term.

On the basis of an assessment of the current and evolving macroeconomic situation, RBI decided to:

• reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5 per cent to 7.25 per cent with immediate effect;
• keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);
• continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75 per cent of NDTL of the banking system through auctions; and
• continue with overnight/term variable rate repos and reverse repos to smooth liquidity.
• Consequently, the reverse repo rate under the LAF stands adjusted to 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 8.25 per cent.

RBI in its assessment to economy noted that the global recovery is still slow and getting increasingly differentiated across regions. In the United States, the economy shrank in Q1, while the euro area, financial conditions have eased due to the European Central Bank’s (ECB) quantitative easing and a depreciating euro. For most emerging market economies (EMEs), macroeconomic conditions remain challenging due to domestic fragilities, exacerbated by bouts of financial market turbulence. So far as India is concerned, the Central Statistics Office has revised downwards its estimate of India’s gross value added (GVA) at basic prices for 2014-15 by 30 basis points from the advance estimates. Reflecting the balance of risks and the downward revision to GVA estimates for 2014-15, the projection for output growth for 2015-16 has been marked down from 7.8 per cent in April to 7.6 per cent with a downward bias to reflect the uncertainties surrounding these various risks. The apex bank also said that merchandise export growth has weakened steadily since July 2014 and entered into contraction from January 2015 through April, with a recent shrinking of even volumes exported. Net exports are, therefore, unlikely to contribute as much to growth going forward as they did in the past financial year. Consequently growth will depend more on a strengthening of domestic final demand. Though, it added that foreign exchange reserves are around US$ 350 billion, providing a strong second line of defence to good macroeconomic policies if external markets turn significantly volatile.

The CNX Nifty is currently trading at 8331.75, down by 101.65 points or 1.21% after trading in a range of 8296.60 and 8445.35. There were 6 stocks advancing against 44 stocks declining on the index.

The top gainers on Nifty were Zee Entertainment up by 1.72%, Lupin up by 1.50%, Bharti Airtel up by 0.76%, Idea Cellular up by 0.20% and BPCL up by 0.15%. On the flip side, Hero MotoCorp down by 3.41%, HDFC down by 2.71%, Indusind Bank down by 2.60%, ITC down by 2.42% and Wipro down by 2.23% were the top losers.

Most of the Asian markets were trading in red barring Shanghai Composite which was up by 19.61 points or 0.41% to 4,848.35.

On the other hand, Hang Seng lost 187.33 points or 0.68% to 27,409.83, Straits Times was down by 42.72 points or 1.26% to 3,349.39, Nikkei 225 was lower by 26.68 points or 0.13% to 20,543.19, KOSPI Index declined by 23.73 points or 1.13% to 2,078.64, Taiwan Weighted lost11.43 points or 0.12% to 9,614.26 and FTSE Bursa Malaysia KLCI was down by 0.14 points or 0.01% to 1,743.27.