RBI's 25 bps rate cut fails to move market. Here's why

At first glance, it appears the RBI rate cut has failed to boost market sentiment as the equity benchmarks Sensex and Nifty fell after the central bank announced a rate cut of 25 basis points.

Sensex plunged 407 points intraday and Nifty fell below 11,200 with most rate-sensitive stocks in the red.

Market observers said while the rate cut is a positive move, the market felt disappointed as it was short of expectations.

"Today's rate cut of 25 bps by the RBI was short of our expectation of a front-loaded cut of 40 bps amidst sharp downside revision of FY20 GDP growth forecast, which is reflective of further widening of the negative output gap," Shubhada Rao, Chief Economist, YES Bank said.

Shishir Baijal, Chairman & Managing Director of Knight Frank India concurs.

"In light of the ongoing economic distress in the country, the 25 basis points cut in policy rate is short of expectation. While it is the fifth consecutive rate cut this year, it is insufficient to support the flagging consumer demand. The stressed real estate sector was looking up to a strong rate cut and sector-specific lending provisions to improve both liquidity scenario and consumer spending ability. As has been witnessed so far, a cumulative 110 bps repo rate cut over the last 6 quarters has failed to stimulate consumer demand as well as private investment in the economy," said Baijal.

Baijal further said that factors such as slowing economic output, rising unemployment rate and low consumer confidence have hindered the percolation of these small quantum rate cuts to the economy at large. On this backdrop, another 25 bps rate cut by Reserve Bank of India (RBI) comes as a disappointment, more so for the real estate sector.

The RBI revised real GDP growth for 2019-20 downwards from 6.9 percent in the August policy to 6.1 percent.

The CPI inflation projection is revised slightly upwards to 3.4 percent for Q2:2019-20 from 3.1 percent projection earlier.

The macroeconomic performance of major emerging market economies was weighed down by a deteriorating global environment in Q3, said RBI Governor Shaktikanta Das.

"The aggravating non-banking financial company (NBFC) liquidity crisis is severely impacting credit availability for the industry, especially developers, as they struggle to raise even construction finance. Lack of liquidity stimulus will only worsen the situation further. Therefore, a substantial rate cut to reinvigorate end consumer demand and intervention on real estate sector-specific lending provisions could have been a better intervention at this juncture," said Baijal.

The central bank and the government have taken several measures to aid the supply side in the recent past.

However, it is the weak consumer sentiment and spending inability that is the fundamental problem of the current economic slump and experts believe unless meaningful initiatives are taken to propel consumer demand, these supply-side interventions may not meet the desired goal of economic revival.

Both bond and equity markets were disappointed.

The Indian currency and bond prices fell after the monetary policy committee of the Reserve Bank of India cut repo rates.

Around 1445 hours IST, the Indian currency traded 5 paise lower at 70.95 per dollar while 10-year government bond yield was at 6.64 percent, up 53 basis points. Bond yields and prices move in opposite directions.