Markets cheer RBI's surprise 50 bps rate cut

Tuesday’s session turned out to be a fabulous day of trade for the Indian equity markets, where frontline gauges garnered gain of over half a percent after Reserve Bank Governor Raghuram Rajan surprised street with a rate cut of 50 basis points. Earlier markets made gap-down start and traded choppy in early deals, tracking weak global cues. But markets witnessed a wild swing to enter into green terrain after Rajan, in his bi-monthly monetary policy announcement, has cut the policy interest rate to a 4-1/2-year low of 6.75 per cent, in a move that, with inflation running at record lows, could help an economy in danger of slowing down. Some support also came with Finance Minister Arun Jaitley’s statement that he is confident of maintaining fiscal deficit at 3.9 per cent in the current financial year and extremely keen to better the 7.3 per cent growth of fiscal year 2014-15.

However, markets ended off day’s high as investors booked some of their profit at higher levels in last leg of trade after Reserve Bank of India (RBI) revised downwards its real GDP forecast for 2015-16 to 7.4 per cent from earlier expectation of 7.6 per cent, saying that the growth is expected to pick up in the latter part of the fiscal. It added that the CPI inflation is expected to firm up from its current trough and rise to around 4.5 per cent in September as favourable base effects reverse and average 5.5 per cent in the third quarter and 5.8 per cent in the fourth quarter of FY16. In its policy review it said that the CPI inflation is expected to average 5.5 per cent in FY17 and moderate to around 4.8 per cent in Q4 of FY17.

On the global front, European counters, after making an awful start, witnessed recovery and were trading mostly in green in early deals. Asian markets ended to three-week lows after weak Chinese data rekindled worries about its fragile economy and led to sharp losses on Wall Street.

Back home, buying in rate sensitive counters viz, banking, realty and auto too aided the sentiments after RBI’s cut rate by 50 bps. Software stock too remained on buyers’ radar after rupee dropped against the dollar. On the flip side, shares of three oil exploration firms dropped after the crude oil prices dropped in the previous trading session. Sugar stocks witnessed some profit booking after their big gains of last session with Indian Sugar Mills Association (ISMA) revising downwards sugar production estimates by a million tonnes to about 27 MT for the marketing year starting next month, compared with 28 mt predicted by it in July and almost 5% lower than the actual output of 28.31 mt.

The NSE’s 50-share broadly followed index Nifty gained around fifty points to end near the psychological 7,850 support level, while Bombay Stock Exchange’s Sensitive Index -- Sensex surged by over one hundred and sixty points to end near the psychological 25,800 mark. Broader markets, however struggled to get any traction and ended the session mixed. The market breadth remained in favour of decliners, as there were 1250 shares on the gaining side against 1356 shares on the losing side while 109 shares remain unchanged.

Finally, the BSE Sensex surged by 161.82 points or 0.63% to 25778.66, while the CNX Nifty gained 47.60 points or 0.61% to 7843.30.

The BSE Sensex touched a high and a low 26054.37 and 25287.33, respectively. The BSE Mid cap index was up by 0.42%, while Small cap index was down by 0.11%.

The top gaining sectoral indices on the BSE were Realty up by 1.99%, Bankex up by 0.90%, Auto up by 0.76%, Capital Goods up by 0.65% and Power up by 0.52%, while Metal down by 1.45%, Healthcare down by 0.89%, Oil & Gas down by 0.85% and Consumer Durables down by 0.38% were the losing indices on BSE.

The top gainers on the Sensex were HDFC up by 3.46%, Maruti Suzuki up by 3.12%, Mahindra & Mahindra up by 2.48%, Coal India up by 1.60% and Larsen & Toubro up by 1.27%. On the flip side, Vedanta down by 5.43%, Tata Steel down by 3.87%, Hindalco down by 3.54%, Dr. Reddys Lab down by 2.67% and Sun Pharma down by 1.21% were the top losers.

Meanwhile, in a most surprising move the Reserve Bank of India (RBI) reduced the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points (bps) from 7.25 per cent to 6.75 per cent. The apex bank said that since last review, the bulk of its conditions for further accommodation have been met and the January 2016 target of 6 per cent inflation is likely to be achieved. Furthermore, it said that investment is likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline, even if transmission is slow. RBI governor termed the decision a front loading action after the Federal Reserve had postponed policy normalization.

In its policy stance at the fourth Bi-monthly Monetary Policy Statement, 2015-16, RBI decided to:

• reduce the policy repo rate under the liquidity adjustment facility (LAF) by 50 basis points from 7.25 per cent to 6.75 per cent with immediate effect; consequently, the reverse repo rate under the LAF stands adjusted to 5.75 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 7.75 per cent.
• keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per cent of net demand and time liability (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 daily variable rate repos and reverse repos to smooth liquidity.

In its policy review RBI noted that since the third bi-monthly statement of August 2015, global growth has moderated, especially in emerging market economies (EMEs), global trade has deteriorated further and downside risks to growth have increased.

Regarding inflation RBI said that the disinflation has been broad-based and inflation excluding food and fuel has also come off its recent peak in June. Looking forward, inflation is likely to go up from September for a few months as favourable base effects reverse. The outlook for food inflation could improve if the increase in sown area translates into higher production.

RBI also pointed that though markets have transmitted the Reserve Bank’s past policy actions via commercial paper and corporate bonds, but banks have done so only to a limited extent. The median base lending rates of banks have fallen by only about 30 basis points despite extremely easy liquidity conditions. This is a fraction of the 75 basis points of the policy rate reduction during January-June, even after a passage of eight months since the first rate action by the Reserve Bank. It further stated that while the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed.

The CNX Nifty touched a high and low 7926.55 and 7691.20 respectively.

The top gainers on Nifty were Maruti Suzuki up by 3.24%, HDFC up by 3.08%, Coal India up by 2.64%, Indusind Bank up by 2.00% and Bank of Baroda up by 1.88% and. On the flip side, Vedanta down by 5.65%, Bosch down by 4.31%, BPCL down by 3.97%, Hindalco down by 3.47% and Tata Steel down by 3.20%, were the top losers.

European Markets were trading mostly in the green; France’s CAC was up by 0.16% and Germany’s DAX was up by 0.33%, while UK's FTSE was down by 0.48%.

The Asian markets closed mostly in red on Tuesday, on concerns over the health of China’s economy. South Korea and Taiwan markets were closed today on account of national holiday. Indonesia will announce the second installment of a stimulus package aimed at supporting the rupiah and reviving growth in Southeast Asia’s largest economy. President Joko Widodo, along with his economics team, will unveil the latest measures at the presidential palace in the coming hours. As part of the package, the central bank is expected to take steps to increase the onshore supply of dollars, including a relaxation of requirements on forward dollar selling and a tax incentive for exporters to keep their dollars in local banks. The government is not expected to announce revisions to the so-called negative investment list that details sectors restricted to foreign funds. The first installment of the stimulus package, announced three weeks ago, has had little effect on markets, and traders doubted whether the coming announcement would evince any significant reaction either. Profits for industrial companies in China dropped 8.8 percent in August, compared to the previous year. It was the biggest fall since October 2011, when the Chinese government first published such data. Chinese coal, oil and gas and metal companies had the greatest losses, information from the National Bureau of Statistics showed.