Indian equities witness shocking trend reversal despite RBI’s step in right direction

Indian equity bourses went through a demoralizing session on the last day of the week as the benchmark indices capitulated to the lowest levels in over two years. The frontline indices got bludgeoned by over two percentage points in the session and even breached the important psychological 15,500 (Sensex) and 4,700 (Nifty) levels. A dramatic wave of selling hit Indian shores in the mid-noon trading session, which triggered across the board panic selling. Jittery investors chose to relentlessly square off positions from the Capital Goods and rate sensitive counters like Banking, Real Estate and Automobile. The local markets remained optimistic for most part of the day amid increasing hopes that the key interest rates have peaked and the Indian central bank will abstain from any more rate hikes after doing so for thirteen times since March 2010. Concerned over economic slowdown, the Reserve Bank kept CRR, repo and reverse repo rates unchanged and indicated that it could cut key policy rates from now onwards to arrest falling growth while keeping a close vigil on inflation. Meanwhile, India’s battered rupee recovered following a range of policy measures introduced by RBI to curb speculation in the foreign-exchange market to protect Asia’s worst performing currency this year. The domestic bourses underperformed against all its global peers on a day when encouraging US economic reports spurred optimistic sentiments among global investors. Optimistic sentiments prevailed across the Asian region while the European stocks too traded on a positive note following the supportive leads from the US were encouraging jobs and manufacturing reports countered worries over the prospects for global economic growth.

Earlier on Dalal Street, the benchmark got off to a reassuring opening after two straight sessions of decline as optimistic sentiments prevailing across Asian markets on the back of encouraging US employment and manufacturing activity reports. The frontline indices soon managed to capitalize on the momentum in morning trades and kept trending higher awaiting the RBI’s policy announcement. There appeared some profit booking after the RBI’s move to keep rates unchanged but sentiments got support from supportive European markets, which helped the key gauges too touch highest point of the day. However, the benchmarks suddenly witnessed a devastating U-turn in the final couple of hours, as hefty position squaring across the board ruthlessly dragged the key indices to over two year lows by the end of trade. The NSE’s 50-share broadly followed index - Nifty suffered a nasty close to triple digit laceration to settle above the crucial 4,650 support level while Bombay Stock Exchange’s Sensitive Index - Sensex took a sharp over three hundred fifty points plunge and closed below the psychological 15,500 mark. Moreover, the broader markets too closed on a pessimistic note with large cuts of close to two percent, performing a tad better than their larger peers did. On the BSE sectoral front, the whole space was painted in deep red with the Capital Goods pocket bearing the maximum brunt of selling pressure as they got thrashed by over four percent. The rate sensitive counters too got heavily punished after the RBI policy announcement as the high beta Realty index nosedived over three percent followed by the Banking index which too went home with similar amount of losses. Though there appeared no sectoral gainer, individual shares like Wipro, Maruti Suzuki and Infosys managed to snap the session in the positive terrain but only with trivial gains. The markets got pounded on extremely large volumes of over Rs 1.98 lakh crore while the turnover for NSE F&O segment too remained on the higher side as compared to Thursday at over 1.82 lakh crore. The market breadth was awfully pessimistic as there were 847 shares on the gaining side against 1,884 shares on the losing side while 143 shares remained unchanged.

Finally, the BSE Sensex shaved off 345.12 points or 2.18% to settle at 15,491.35, while the S&P CNX Nifty plummeted by 94.75 points or 2.00% to close 4,651.60.

The BSE Sensex touched a high and a low of 16,068.90 and 15,425.20 respectively. The BSE Mid cap and Small cap index were down by 1.72% and 1.60% respectively.

The major gainers on the Sensex were Wipro up 0.15%, Maruti Suzuki up 0.10% and Infosys up 0.07%. While, L&T down 5.33%, Sterlite Industries down 4.28%, JP Associates down 4.06%, NTPC down 3.91% and BHEL down 3.88% were the major losers on the index.

There is no gainer on the BSE sectoral space, while Capital Goods (CG) down 4.36%, Realty down 3.34%, Bankex down 3.16%, Power down 2.76% and Metal down 2.59% were the major losers on the BSE sectoral space.

Meanwhile, the Reserve Bank of India (RBI), for the first time since March 2010, kept the key policy rates unchanged. In the mid-quarter monetary policy review, the RBI kept its repo rate, the rate at which RBI lends funds to banks constant at 8.5% and reverse repo rate, at which the RBI borrows money from banks at 7.5%. The RBI also left the cash reserve ratio (CRR), which is the amount of cash the banks have to maintain with the central bank, unchanged at 6%, despite market speculation that it might cut the ratio in order to bolster market liquidity. Bank rate was also maintained at 6%.

The RBI in its mid-quarter monetary policy review, said, ‘on the domestic front, growth is clearly decelerating. This reflects the combined impact of several factors; the uncertain global environment, the cumulative impact of past monetary policy tightening and domestic policy uncertainties.’

‘Both inflation and inflation expectations are currently above the comfort level of the Reserve Bank. However, reassuringly, inflationary pressures are expected to abate in the coming months despite high crude oil prices and rupee depreciation. The growth deceleration is contributing to a decline in inflation momentum, which is also being helped by softening food inflation’ the RBI added.

Finance Minister Pranab Mukherjee on December 15, said that the government's focus needs to shift back to growth concerns in view of weakening growth and market sentiments. 'The present indicators show that both private consumption and investment sentiments have weakened and it is this weakening of sentiments that makes it necessary to shift some of our focus back to near term issues.’

On the domestic front, agricultural prospects look promising on the back of expected record kharif output and satisfactory progress on rabi sowing. However, industrial activity is moderating, driven by deceleration in investment, which is a matter of serious concern, the RBI said.

However, by adding further it said that overall, the growth momentum in the economy is clearly moderating. Further, considering the global and domestic macroeconomic situation, the downside risks to the Reserve Bank’s growth projection, as set out in the Second Quarter Review (SQR), have increased significantly. 

The S&P CNX Nifty touched a high and low of 4,818.85 and 4,628.20, respectively.

The top gainers on the Nifty were GAIL up 4.06%, HCL Tech up 1.27%, Dr Reddy up 1.25%, Grasim up 0.83% and BPCL up 0.63%. On the flip side, L&T down 6.20%, PNB down 5.59%, Axis Bank down 5.17%, JP Associates down 4.80% and Sterlite Industries down 4.66% were the top losers on the index.

The European markets were trading in green. France's CAC 40 up 0.35%, Britain's FTSE 100 up by 0.63%, and Germany's DAX was up by 0.03%.

Asian stocks rose on Friday amid improving US jobs and manufacturing data and the expected approval in Italy of an austerity plan intended to get the country’s finances under control. Later today, the Italian government will hold a critical confidence vote in the lower house of parliament on a multibillion euro austerity package. Despite widespread opposition, the plan aimed at persuading bond markets that the country can emerge from the widening European debt crisis is expected to pass. Traders were also encouraged by a report from the Federal Reserve of New York that its index measuring regional manufacturing jumped to the highest level since May.

Chinese main stock index closed up 2 percent on Friday, supported by speculation that some sort of stock-boosting measures could be announced. Seoul shares rose over a percent, buoyed by signs of strength in the US economy and a solid bounce in battered automakers, but gains were limited by institutional selling that continued for a second consecutive session.