RBI’s rate cut decision fails to cheer Dalal Street

Indian equity benchmarks retreated from record highs and ended the session with a cut of around one third of a percent on Wednesday, as Reserve Bank of India’s (RBI’s) decision to lower the policy rate by 25 bps to 6% failed to boost sentiment. This was the first rate cut since October 2016 and the interest rate is now at a 6-year low. No change in cash reserve ratio (CRR) too dampened sentiments. Though, markets started the session on positive note, as traders took some encouragement with Minister of State for Finance Santosh Kumar Gangwar’s statement that the government has collected over Rs 1.80 lakh crore in direct tax till July 15 in the current fiscal, an increase of 21.4% year-on-year, ‘belying’ fears of slowdown in economic activities. The current growth rate is higher than the target rate of 15.32% required to achieve the Budget Estimate. Meanwhile, Finance Minister Arun Jaitley has said that the GST Council, at its next meeting later this week, will finalise a mechanism to operationalise anti-profiteering clause which seeks to protect consumers’ interest. GST Council comprising state finance minister will meet on August 5 to take stock of implementation of GST which was rolled from July 1.

However, markets turned red and extended fall despite the announcement of a 25 basis points cut in the repo rate by RBI, as the markets appear to have already factored in a quarter percentage point rate cut. Traders also remained concerned after finance minister Arun Jaitley cautioned that the fiscal deficit of states may rise this year, with states likely to tap the markets to raise funds to finance farm debt waivers. Some cautiousness also came with the Central Electricity Authority’s (CEA) statement that about 7% of India's coal-fired power plants may never be able to comply with new environmental norms because they lack the space to install emission-cutting equipment, potentially leading to their shutdown.

Weak opening in European counters too dampened sentiments, as investors focused on a fresh batch of corporate earnings and began to prepare for the Bank of England’s policy statement on Thursday. UK construction sector activity dropped more than expected in July, hitting an 11-month low. However, Asian markets ended mostly in green led by half a percent gain in Japanese Nikkei.

Back home, Indian rupee that has been seen among the top performing world currencies surged to 63.73, a two-year high, against the US dollar at the time of equity markets closing. Meanwhile, RBI in its third bi-monthly policy review for FY18 enlightened that external demand conditions are gradually improving and should support the domestic economy, although global political risks remain significant. Keeping in view these factors, the projection of real GVA growth for 2017-18 has been retained at the June 2017 projection of 7.3%.

On the sectoral front, shares of rate sensitive sectors such as financials, automobiles and real estate edged lower despite the RBI cutting the repo rate and reverse repo rate by 25 bps at 6% and 5.75%, respectively. However, shares of fertilizers companies remained in focus in otherwise subdued market after Minister of State for Fertiliser Mansukh L Mandaviya said that Nearly two lakh point-of-sale (POS) machines have been installed across the country for the roll out of the direct benefit transfer (DBT) for fertiliser subsidies by March 31, 2018.

The NSE’s 50-share broadly followed index Nifty declined over thirty points to end below its psychological 10,100 support level, while Bombay Stock Exchange's Sensitive Index -- Sensex was down by around hundred points to end below its crucial 32,500 mark. The broader markets however struggled to get any traction and ended the session in red. The market breadth was in the favour of decliners, as there were 1,061 shares on the gaining side against 1,593 shares on the losing side, while 179 shares remain unchanged.

Finally, the BSE Sensex shed 98.43 points or 0.30% to 32,476.74, while the CNX Nifty was down by 33.15 points or 0.33% to 10,081.50.

The BSE Sensex touched a high and a low of 32,686.48 and 32,394.89, respectively and there were 7 stocks on gaining side as against 24 stocks on losing side on the index.

The broader indices ended in red; the BSE Mid cap index declined 0.30%, while Small cap index was down by 0.07%.

The top gaining sectoral indices on the BSE were Consumer Durables up by 1.12%, Energy up by 0.68%, Utilities up by 0.29%, Power up by 0.11% and Consumer Discretionary Goods & Services was up by 0.11%, while IT down by 0.88%, Capital Goods down by 0.83%, FMCG down by 0.76%, TECK down by 0.75% and Industrials was down by 0.62% were the losing indices on BSE.

The top gainers on the Sensex were NTPC up by 4.06%, Hero MotoCorp up by 2.12%, Adani Ports & SEZ up by 2.08%, Lupin up by 1.60% and Reliance Industries up by 1.59%. On the flip side, Sun Pharma down by 1.95%, Dr. Reddy’s Lab down by 1.93%, Tata Motors down by 1.66%, Kotak Mahindra Bank down by 1.39% and TCS down by 1.30% were the top losers.

Meanwhile, a joint study carried out by the industry body Associated Chambers of Commerce & Industry of India (ASSOCHAM) and NEC Technologies has stated that India will need to significantly speed up the pace of solar capacity additions by 10,000 MW this fiscal and over 15,000 MW per year in order to meet the 2022 target of 1,00,000 MW (100GW), which the government set up in 2014. The study also noted that the country’s installed solar capacity fell short of target of 17,000 MW by the end of FY17.

Pointing to the efficiency of solar cells as the biggest technological issue, the joint report titled ‘Capacity Building and Skill Development' stated that currently, the efficiency ranges from 12-20 percent, though this continues to improve. It also said that the rest of the energy striking the panel is either reflected or is wasted as heat. It also explained that the main issue with efficiency is that higher efficiency solar panels cannot be commercially mass produced.

To achieve the 100GW target by 2022, the study further stated that the focus has slightly shifted from indigenous manufacturing as policies to curb the imports from other countries are not benefiting the domestic manufacturing. On the GST front, the study stated that the increase in taxes in the GST structure in solar from zero percent to 5 percent, along with reduced taxes in coal from 11.69 percent to 5 percent, may lead to slow adoption of solar in the Indian energy sector. It added that lack of uniform policies across sectors and implementation issues is also an area of concern. 

Highlighting the fact that foreign investment in Indian solar industry currently is less than 20 percent, the study said  even 100 percent FDI under automatic route and 74 percent through foreign equity participation in a joint venture (without approval) have not paved the way for significant foreign investments in Indian solar industry. It noted that the solar panels used in India are not designed to handle very high temperatures and dust prone conditions. Because of this, it said that module damage is common and results in loss in energy generation.

The CNX Nifty traded in a range of 10,137.85 and 10,054.20. There were 13 stocks in green as against 38 stocks in red on the index.

The top gainers on Nifty were NTPC up by 4.03%, Ambuja Cement up by 2.22%, Hero MotoCorp up by 2.01%, ACC up by 1.98% and Adani Ports & SEZ up by 1.79%. On the flip side, Indiabulls Housing Finance down by 2.40%, Dr. Reddy’s Lab down by 2.18%, Sun Pharma down by 1.92%, Tata Motors down by 1.47% and Bharti Infratel down by 1.45% were the top losers.

European markets were trading in red; UK’s FTSE 100 decreased 12.79 points or 0.17% to 7,410.87, Germany’s DAX slipped 5.07 points or 0.04% to 12,246.22 and France’s CAC was down by 0.55 points or 0.01% to 5,126.48.

Asian equity markets closed mostly higher on Wednesday as Apple reported better-than-expected financial results and weak US personal income and manufacturing data helped investors pare back their expectations for rate increases this year. Japanese shares hit a 1-1/2-week high as solid quarterly results from domestic companies helped offset concerns over a rising yen. However, Chinese shares ended lower, with continued strength in materials shares offset by weakness in small-cap firms.