Investors shrug global rally as RBI’s status-quo triggers brutal risk aversion on D-Street

The Reserve Bank of India’s (RBI) mid-quarter monetary policy review day turned out to be a tumultuous one for the stock markets in India, which reversed their course immediately after the RBI’s policy decision came to the fore. The benchmark equity indices not only got ruthlessly slaughtered by about three percentage points from the high point of the day but also went on to undo all the good work done in the past week.

After getting off to a gap up opening, the markets traded with hefty gains of over a percent for most part of morning trades as cues from across the global space remained supportive. Greek parliamentary elections’ likely verdict of a narrow victory to parties that supported a bailout for the country’s failed economy, propelled market participants across the Asian region into an euphoric mood as the vote was widely seen as a last chance for the debt laden nation to remain in the European Union.

Most markets in the European region too traded with over a percent gains as fears of a global financial turmoil due to Euro-zone break-up got dispelled with the Greek election’s likely outcome.

However, the frontline equity indices settled with huge losses of about one and half a percent on the week’s first trading session as sentiments’ got spooked after RBI maintained a status quo on key interest rates, choosing to keep its focus on reining in the inflationary pressure on economy rather than stimulating economic momentum. The key gauges found some support around the psychological 5,050 (Nifty) and 16,700 (Sensex) levels. The central bank’s move defied wider market expectations of a cut in key interest rates by 25 basis points as they expected RBI to employ monetary easing measures to bring the economy out of doldrums.

Meanwhile, a separate data highlighted that India’s consumer price inflation moved up marginally to 10.36% in May on account of increase in prices of vegetables, edible oils and milk. Moreover, cues from the money market too remained disappointing as rupee came off the day’s highs and depreciated against the US dollar.

On the BSE sectoral space, the rate sensitive Bankex and Realty pockets got brutally butchered by close to three percent and remained the top laggards, while the defensive FMCG counter too witnessed severe selling pressure and plunged over one half a percent. Amid the broad based position squaring, the only index which went home with slight gains was the Consumer Durables index which added ten points.

On the global front, markets across the Asia showed optimistic trends as investors remained hopeful that Greece will not break from the single currency union after pro-austerity parties won enough seats to form a government.

European markets too got a positive start, however the major equity indices failed to sustain the momentum and have slipped closer to their previous closing levels. Market men remained worried over the Euro-zone financial turmoil, which looked far from getting resolved as concerns over Spain's debt-ridden banks and its potential contagion to Italy lingered.

Back home, the NSE’s 50-share broadly followed index Nifty, got thrashed by about one and half a percent to settle above the psychological 5,050 support level while Bombay Stock Exchange’s Sensitive Index - Sensex plunged close to two hundred fifty points to finish just above the crucial 16,700 mark. Moreover, the broader markets too settled on a pessimistic note with losses of a percent but performed relatively better than their larger peers.

The markets got pummeled on extremely large volumes of over Rs 2.2 lakh crore while the turnover for NSE F&O segment also remained on the higher side as compared to that on Friday. The market breadth remained awful as there were 1,003 shares on the gaining side against 1,688 shares on the losing side while 117 shares remained unchanged.

Finally, the BSE Sensex shaved off 244.00 points or 1.44% to settle at 16,705.83, while the S&P CNX Nifty plunged by 74.80 points or 1.46% to close at 5,064.25.

The BSE Sensex touched a high and a low of 17,109.95 and 16,636.09 respectively. The BSE Mid cap index was down by 1.06% and Small cap index down by 0.70%.

Tata Steel up 1.29% and Bajaj Auto up 0.94% were the major gainers on the Sensex, while SBI down 4.36%, Sterlite Industries down 4.34%, ICICI Bank down 3.34%, HDFC Bank down 2.71% and Dr Reddys down 2.38% were major losers on the index.

The only gainer on the BSE sectoral space was Consumer Durables (CD) up 0.16%, while Bankex down 3.16%, Realty down 2.78%, FMCG down 1.68%, PSU down 1.39% and Power down 1.29% were top losers on the BSE sectoral space. 

Meanwhile, dampening the growing sanguinity in financial markets, the Reserve Bank of India (RBI), often regarded as one of the world's most aggressive central banks, lived up to the tag as they dashed all hopes of slashing key interest rates by leaving them unmoved in its recent mid-quarter monetary policy review meet. The RBI maintained status quo on the repo rate, rate at which banks borrow money from RBI, keeping it unchanged from its 8 percent levels.

Consequently, the reverse repo rate, rate at which Reserve Bank borrows money from banks, under the liquidity adjustment facility (LAF) remained unchanged at 7.0 percent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 percent. Meanwhile, scheduled banks’ cash reserve ratio (CRR), ratio which individual banks need to keep on hand in the form of cash reserves with the central bank, was also left unchanged at 4.75 percent of their net demand and time liabilities.

The central bank’s move has defied wider market expectations of a cut in key interest rates by 25 basis points as they expected RBI to employ monetary easing measures to bring the economy out of doldrums. The IIP numbers released by the government last week suggested that industrial production grew at a frustratingly slow pace while the country's economic growth rate slipped to 5.3 percent in the fourth quarter of 2011-12, lowest in nearly 9 years due to poor performance of the manufacturing and farm sectors.

However, the most recent inflation reading painted a gloomier picture of the economy as it accelerated to 7.55 percent levels in May, leaving the RBI in a tight spot. Recent growth-inflation dynamics have prompted the Reserve Bank to indicate that no further tightening is required. Notwithstanding the deceleration in economic growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions.

At a time when most experts are criticizing the apex bank for not stimulating growth, some experts commended RBI’s decision to hold rates amid the highly inflationary scenario. They were of the opinion that by keeping monetary policy tight the RBI is trying to rein in the inflationary pressure on the economy which is a well thought plan and would augur well for the economy in the long run.

The S&P CNX Nifty touched a high and low 5,190.20 and 5,041.70 respectively.

The top gainers on the Nifty were Power Grid up 1.23%, Tata Steel up 1.19%, Bajaj Auto up 1.14%, Cairn up 1.00% and ACC up 0.40%. On the flipside, SBI down 4.72%, PNB down 4.02%, Sterlite Industries down 4% and Reliance Infra down 3.62% were the top losers on the index.

The European markets were trading in green, as France's CAC 40 up 0.14%, Germany's DAX up 0.68% and United Kingdom’s FTSE 100 up 0.34%.

Buoyed by favourable outcome from Greek election, sentiment in the Asian region continued their bullish run with all the equity indices snapping the day’s trade in the positive terrain on Monday. Greek polls provided hopes that Greece will stay in euro-zone after New Democracy emerged as the largest party with around 30 percent vote share followed by Syriza party with 27 percent vote share. Socialist PASOK won over around 13 percent. Moreover, investors are keenly awaiting the outcomes of US Federal Reserve meeting and G20 summit this week and a European Union leaders summit later this month, which would give markets further direction.

Meanwhile, the results of Greece election were welcomed by the governments of Japan and China -- two of Europe’s biggest creditors -- which called for leaders in Greece to act quickly to form a cabinet. The benchmarks of the country jumped 1.77 percent and 0.40 percent respectively. In addition, Taiwan stocks rose 1.76 percent on Monday, joining other Asian bourses in rallying after Greece’s election result calmed fears of global financial turmoil, with tech stocks leading gains at the expense of defensives such as steel and plastics.