A rate-cut could be one of the short-term solutions, which was widely expected by the Street before Lok Sabha polls.
Economic growth has slowed down to a 20-quarter low of 5.8 percent in Q4FY19, and the consumption has remained weak for several months now due to the ongoing liquidity crisis. On the other side, inflation has been under the RBI target of 4 percent for many quarters even as crude oil has remained volatile around $60-70 a barrel. All these reasons are pointing toward a rate cut in the Monetary Policy Committee meeting which will be concluded on June 6.
The hope turned much stronger especially after the NDA government saw a landslide victory in general elections 2019 that lifted Nifty from 11,100 to 12,100 in just a two-and-half-week period. And, to revive the economy and boost consumption, it is widely expected that the Modi government is likely to consider the short-term, as well as long-term, measures.
Rate cut could be one of the short-term solutions, which was widely expected by the Street before Lok Sabha polls, experts said.
But, the key question is: will the RBI go for a rate cut in the current policy meeting? If yes, is it a 25 bps or a 50 bps? Also, what has the market priced in?
Most experts feel the RBI could cut repo rate, at which banks lend money to lenders, by at least 25 bps. In an optimistic case, it could be 50 bps for which chances are minimal.
"I expect the RBI to cut rates by 25 basis points, change their monetary stance to accommodative and strongly address the liquidity deficit, may be even go for a surplus liquidity framework from neutral one presently. Inflation is not of concern and economic growth needs support. This will provide momentum to the market in coming days," said Amar Ambani, President & Research Head, YES Securities who reiterated Nifty target at 13,000 in 2019.
He expects another 25 basis point rate-cut after the FY20 Union Budget, scheduled to be held on July 5.
Romesh Tiwari, Head of Research – CapitalAim, also said D-Street was expecting at least 25 bps rate-cut this Thursday. "Although, on the back of weak data of growth pouring in, we can even expect a 50 bps rate cut or indications of rate cuts to continue after monsoon. Inflation at this level is not a concern and so the market is expecting some immediate measures to revitalize the economy."
Now, what has the market priced in?
Experts who spoke to Moneycontrol said the market had already priced in a rate-cut of 25 bps.
So, if that comes true, the market could go for profit booking or sideways trade which we was already seen on Friday. In addition, if the RBI decides to wait for the monsoon, there could be some sharp correction. But, if the RBI cuts the rate by 50 bps by any chance, that could be a surprise and the market could see a rally, they said.
"As the market is already expecting the 25 bps rate cut so it may not trigger any substantial upmove for the Nifty from this level but we may see the banking stocks moving further upwards, although a 50 bps cut may take this rally further and Nifty may move above 12,200 in the next few days. No rate cut will certainly be a bad news and will trigger the long due correction," Romesh Tiwari, Head of Research at CapitalAim, told Moneycontrol.
According to Umesh Mehta – Head of Research at SAMCO Securities, it has always been a “sell on news and buy on rumours” kind of scenario when the RBI is concerned. There have been instances wherein, six out of 10 times, markets have moved lower despite a rate cut by the RBI.
"This time too there are higher chances of the markets experiencing profit booking since a 25bps cut is already factored in. However, a deeper cut of 0.5 percent could be a surprise which could swing the markets in either direction," he added.
Jayant Manglik, President - Retail Distribution, Religare Broking, is among the few analysts who believe that the RBI would await more data on monsoon progress and inflation before the rate-cut.
Meanwhlie, a few experts and reports suggested that, this time, the RBI may tweak its pattern of cutting the rate in a band of 25 bps to 5 bps or 10 bps in the policy meeting.
Dr VK Vijayakumar (Chief Investment Strategist at Geojit) is one expert who believes a positive surprise would be a 35 bps cut with a change in stance to accommodative.The market rallied sharply from 11,100 to 12,100 levels on the Nifty in just two and half weeks after the NDA win. Also, there has been hope of strong policy measures to revive economy and boost consumption. The consistent foreign liquidity supported market as well.Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.