Market reaction after the surprise 50bps repo rate cut

After raising interest rates for 13 times between March 2010 and October 2011, the Reserve Bank of India (RBI) surprisingly cut interest rates on Tuesday for the first time in three years by an unexpectedly 50 basis points to revive the sagging economic growth. Consequent to this, repo rate under the liquidity adjustment facility (LAF) now stands at 8%, while the reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, gets adjusted to 7%.

Investors cheered the rate cut, with bond yields falling, stocks extending gains and rupee recuperating from three month’s low level touched in the previous session, amidst the fear that the rally could be stalled on the expectations that there will be few further cuts in the near term. As the apex bank, while delivering the surprise 50 bps rate cut, warned that that there is limited scope for further rate cuts.

D Subbarao, Governor of RBI also pointed that the state of the economy as a matter of growing concern. He said, ‘though inflation has moderated in recent months, it remains sticky and above the tolerance level, even as growth has slowed. Significantly, these trends are occurring in a situation in which concerns over the fiscal deficit, the current account deficit and deteriorating asset quality loom large. In this context, the challenge for monetary policy is to maintain its vigil on controlling inflation while being sensitive to risks to growth and other vulnerabilities.’

Stock Markets:

BSE’s Sensex reaction:

Before:  BSE Sensex was trading at 17,159.57, up by 8.62 points or 0.05%. The index touched a high and low of 17225.13 and 17112.41 respectively. There were 17 stocks advancing against 12 declining ones on the index, while 1 stock remained unchanged.

After: BSE Sensex shot up by 97.25 points or 0.57% to trade at 17,248.20. The index touched a high of 17,373.28 and low of 17,103.36. 26 stocks advanced against 4 declining ones on the index.

NSE’s Nifty reaction:

Before: The S&P CNX Nifty was trading at 5,223.35, down by 2.85 points or 0.05%. The index touched a high and low of 5266.60 and 5212.05 respectively. There were 27 stocks advancing against 22 declining ones on the index.

After: The S&P CNX Nifty soared 29.80 points or 0.57% to trade at 5,256.00. The index touched a high of 5,293.40 and low of 5,208.35. 43 stocks advanced against 7 declining one’s on the index.

Indian Rupee Reaction:

Before: The partially convertible currency was trading at 51.62/63, stronger by 6 paise from its previous closing of three month low at 51.68, on Monday.

After: The partially convertible currency was trading at 51.60, stronger by 8 paise from its previous close.

Indian Bond Yields Reaction:

Before: The yields on 10-year benchmark 8.79% - 2021 were at 8.47% from its previous close of 8.45%, after the central bank warned of persistent upside risks to inflation late Monday.

After: The 10-year bond yield fell as much as 6 basis points to 8.39% from its previous close of 8.45% on Monday.