In a surprise move, the Reserve Bank of India (RBI) slashed report rate by 40 bps to 4 percent and the reverse repo rate now stands at 3.35 percent.
The S&P BSE Sensex plunged more than 400 points while the Nifty50 slipped below 9,000 levels soon after the Reserve Bank of India governor Shaktikanta Das unveiled policy measures to combat the slowdown in the economy.
In a surprise move, the Reserve Bank of India (RBI) slashed repo rate by 40 bps to 4 percent and the reverse repo rate now stands at 3.35 percent.
The MPC also decided to continue with an accommodative stance as long as it is necessary to revive growth and mitigate the impact of COVID-19 on the economy while ensuring that inflation remains within the target, RBI said in a policy statement.
Banks, and NBFC stocks suffered the most. We have collated a list of 5 factors which could be weighing on the markets:
Negative growth rate:
This is something that economists have already been talking about. Goldman Sachs in a recent report said that India’s gross domestic product (GDP) is expected to contract by 5 percent for the year, worsening from the bank’s earlier prediction of a negative 0.4 percent growth.
“RBI has also firmly accepted negative GDP growth rate in H1 of Financial Year 2021 which will be the first time ever in independent India. This statement may put pressure on banking stocks in the short term, as banks perform well in *expansionary balance sheet rather than the contrary balance sheet,” Amit Jain, Co-founder & CEO, Ashika Wealth Advisors said.
No one-time restructuring of loans:
The 40bps repo rate cut move was in line with market expectations but the RBI didn't provide a full-fledged restructuring of loans which could be beneficial for the banks, suggest experts.
“It was a good effort policy by RBI through an extension of moratorium is a short term measure and not really long term. Rate cuts and reverse repo rate cut are moves in the right direction but risk aversion by banks is still high,” Virendra Somwanshi, MD & CEO, Motilal Oswal Private Wealth Management told Moneycontrol.
“Even though one-time loan restructuring would have led to credit rating issues, it would have been a step in the right direction which the market was expecting,” he said.
Extension of Loan moratorium negative for NBFCs:
The RBI has permitted commercial banks, cooperative banks, small finance banks, AIFIs and NBFCs (termed as “lending institutions”) to allow a further 3-month moratorium i.e from June 1 to August 31, 2020 on the payment of installments in respect of term loans outstanding as on March 31, 2020. Consequently, the repayment schedule may be shifted by an additional 3 months
“For banks, the clarity on asset quality picture of the lenders will now emerge by March 2021 instead of September 2020,” Amar Ambani, Senior President and Head of Research – Institutional Equities, YES Securities said.
“There is a risk of moral hazard issue creeping in, as borrowers who have the ability to pay, may even opt for a moratorium,” he said. For MFIs and NBFCs catering to the bottom of the pyramid customers, the risk of repayment behavior getting disturbed is higher.
RBI may be using up ammunition a little prematurely:
A surprise rate cut could have boosted the market, but it turned out to be the other way around. Experts feel that the pain in the economy is likely to continue as long as India remains to be in a lockdown phase, but the govt. and RBI may be using fiscal and monetary measures prematurely and wait for the lockdown to open.
“The street, in a time when close to two-thirds of the country is under lockdown, keeps expecting more and more reliefs without knowing as to how each of these will be helpful. Shareholders of Banks are worried by the current economic conditions and the pain that is postponed due to the moratorium being extended,” Dhiraj Relli, MD & CEO, HDFC Securities told Moneycontrol.
“The Govt and the RBI may be using up all their ammunition a little prematurely to fight the current situation. One wonders whether all these relief measures would have been more impactful after the lockdown was completely lifted,” he said.
FIIs may reduce positions in Debt market:
“Today extended policy rate cut by 0.4%, may further bring down interest rates on fixed deposits and savings accounts. Due to less attractive rates, FII may reduce positions in the Debt market, which might make India Inc. suffer due to depreciation of the currency in medium to long term,” says Jain of Ashika Wealth Advisors.