The Bombay Stock Exchange (BSE) building is illuminated during a special "muhurat" trading session for Diwali, the festival of lights, in Mumbai, India, November 11, 2015. Stock markets opened on Wednesday for a special one-hour Diwali holiday session. REUTERS/Shailesh Andrade
The Reserve Bank of India (RBI) on Wednesday delivered what the D-Street wanted, a cut of 25 bps points ahead of festive season. But, the central bank is unlikely to oblige investors with another rate cut in its upcoming policy meet on October 3 and 4.
The market witnessed classic buy-on-rumours and sell-on-news kind of phenomena soon after the central bank declared its verdict. The S&P BSE Sensex fell nearly 100 points while the Nifty50 ended below 10,100. The Nifty Bank closed 67 points lower at 25,055.
The RBI kept projections for inflation at 4 percent and is expected to be at the same level while concern over recent loan waiver by the various state governments have been flagged red in the near term.
The transmission has been much stronger in new lending, particularly in personal loans and home loans, RBI Governor Urijit Patel said in a press conference.
“This is the beginning of the festive season with Eid, Ganesh Chaturthi, and Dusshehra lined up over the next two months. Sectors such as realty, automobile, and consumer durables are expected to see much traction in the next couple of months,” Adhil Shetty, CEO & Co-founder BankBazaar.com told Moneycontrol.
“Rate cuts at this time mean that the cost of credit required to make big-ticket purchases such as a home or a vehicle comes down even further. This is a very good signal to the market and has the potential to push growth in several sectors,” he said.
A rate cut of 25 bps was largely discounted by markets which led to a sharp rally in Nifty as well as Nifty Bank since last month. The Nifty rose from 10,000 to 10,150 while Nifty Bank scaled 25000 peak.
This was mostly discounted in prices where we have seen the recent run up in broader indices as well. Nifty inching from 10k to 10150 and Bank Nifty performed well as it jumped from 24500 to 25200.
“We have seen positive built up in interest rate sensitive sectors like automobile, banking, reality, and NBFC. So, liquidity was already present for a while and with this boost, we may see further momentum,” Mustafa Nadeem, CEO, Epic Research told Moneycontrol.
“We expect reality stocks to pick some momentum while private banks will do well due to their better return on deposits as compared to PSU banks,” he said.
Nadeem further added that he maintains a buy on dips strategy with next targets around 10400 - 10450 while we see the fresh base for Nifty at 9950. Bank Nifty may set the tone towards 25800 while the base is seen at 24800.
Focus on Pradhan Mantri Awas Yojana
The MPC is of the view that there is an urgent need to reinvigorate private investment. The need to remove infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for housing needs should benefit banks, realty as well as NBFC stocks.
The success of the project hinges on speedier clearance of projects by the states. On their part, the government and the Reserve Bank are working in close coordination to resolve large stressed corporate borrowers and recapitalise public sector banks within the fiscal deficit target. These efforts should help restart credit flows to the productive sectors as demand revives.
“The government and the RBI are working in close coordination to resolve large stressed corporate borrowers and recapitalise public sector banks within the fiscal deficit target. These efforts should help restart credit flows to the productive sectors as demand revives,” Deepak Jasani, Head Retail Research - HDFC Securities told Moneycontrol.
“Availability of credit may be more important than its cost in times when a large section of the business community is undergoing stress. While the markets may react in a knee-jerk fashion in the extreme near term, post 24 to 48 hours, it may come back on its original path which seems to be gradually up at least for the next 2-3 weeks,” he said.
Inflation Data Eyed
The central bank highlighted that high-frequency indicators suggest that price pressures are building up in vegetables and animal proteins in the near months. And, if states choose to implement salary and allowance increases similar to the Centre in the current financial year, headline inflation could rise by an additional estimated 100 basis points.
“The RBI's MPC cut repo rates by 25 bps as expected. Noting, however, that the trajectory of inflation in the baseline projection is expected to rise from current lows, the MPC decided to keep the policy stance neutral and to watch incoming data,” said Jasani of HDFC Securities.
Further rate cuts will be dependent on inflation data, but analysts are not ruling out another rate cut probably later in the calendar year 2017. Although, chances of that happening look bleak but the central bank has once again asked banks for effective transmission of rates.
Kshitij Anand is the Editor Markets at Moneycontrol.