Lukewarm welcome of RBI Rate Cut by Market

Author: Bappaditta Jana

Yesterday, the Monetary Policy Committee did the unexpected but hoped. They unanimously decided to cut the rates by 25 bps, thus bringing the key policy interest rates to its lowest level since 2011. The rate cut had the main objective of bringing the CPI Inflation at 5% by the fourth quarter of 2016-17. Retail inflation stands at 5.05%, the lowest in five months. Although the Governor, Urjit Patel, did not throw a hint on the future stance on rate cut by committee, however, his colleagues and the RBI ED hinted on the scope of easing the interest rates further in future.

With this rate cut, the policy rates have been reduced by 175 bps since January 2015 by RBI. However, the Banks have failed to pass on the full quantum of the reductions to lending rates so far.

Market Reaction:

Market gave a lukewarm welcome to the RBI’s rate cut. The shares of interest-rate sensitive stocks from Banking, Automobile and real estate sectors registered moderate gains.

The BSE Realty index rose 0.96% while Nifty Realty closed 0.38% higher; BSE Bankex gained 0.42% with Bank Nifty closing 0.43% higher than the previous close. BSE Auto index edged 0.05% higher with Nifty Auto made the close after rising 0.14%.

The big lenders like SBI and PNB gained 1.6%, Federal Bank gained 1.07%, Yes Bank advanced 0.97% and ICICI Bank rose 0.84%. On the other hand IndusInd Bankand Axis Bank ended up 0.75% lower.

ICICI Bank reduced its MCLR by 5 basis points across various loan tenures. Post the cut, the one-month MCLR is 8.85 per cent, while the one-year MCLR is 9.05 per cent. Other banks hinted that they could cut lending rates if liquidity stays comfortable.

NBFC hiked by 7.33% and Oberoi Realty went up by 3.84%. Tata Motors became the only Auto stock with a healthy gain of 1.6% while Bajaj Auto and Hero MotoCorp gained 0.63%. On the other hand Maruti Suzuki slipped by 0.03%.

The Public Sector Banks reacted well to the rate cuts and the proposal to ease stressed assets norms. The rally is expected to extend as valuations are not expensive and the worst appears to be behind on the credit cost front. On the day of credit policy declaration, Nifty PSU Bank Index went up by 0.43% and Nifty hiked by 0.4%. Among the PSU’s Union Bank of India rose the highest, advancing 6.8% while others like Canara Bank, SBI, PNB increased between 2-4%.

Reasons for Rate Cut:
  • Inflation: The month of August have witnessed the negative momentum of food inflation, pulling down the CPI to the intra-year low. This gave RBI and MPC some comfort and room for slashing the rates.
  • Liquidity: The Liquidity infusion of Rs. 20,000 crores has helped the liquidity conditions to remain comfortable in the third quarter of this calendar year. The Weighted Average Call Money Rate or WACR traded with a soft bias, remaining tightly aligned with the policy repo rate. Interest rates on Commercial papers and Certificate of Deposits also eased enabling the smooth transmission of policy action through different market segments.
  • The Rural Push:The outlook for agriculture and allied activities has brightened considerably. Kharif has surpassed last year’s acreage. Barring cotton, sugarcane and jute and Mesta, the first advance estimates of kharif food grains production for 2016-17 have been at a record level, and higher than the target set for the year.
  • Manufacturing: Not much activity is detectable in the industrial sector which went through a contraction in the early financial year, after a sequential deceleration in gross value added in Q1. Some space of growth was visible in the steel sector as production rose to a 37-month high and cement production maintained impetus. Output of core industries was weighed down by a decline in the production of coal, crude oil and natural gas and deceleration in refinery products and electricity generation. In the services sector, the hastening in the pace of activity in Q1 appears to have been sustained.

Positive Outlook: The sturdy public investment in roads, railways and inland waterways, the new efforts to clear cash flows in large projects under arbitration, and the increase in spending from the 7th Pay Commission’s award, should improve the industrial outlook. The drive of growth is estimated to quicken with a normal monsoon raising agricultural growth and rural demand, as well as by the motivation to the urban consumption spending from the pay commission’s award.

Concluding:

Corporate India couldn’t get a better Diwali Gift from the new Governor. The rate cut could save companies around Rs. 6,300 crore in the interest outgo yearly. After the rate cut, the market has set its eye on the GST and 7th Pay Commission. And now the market is looking for another rate cut in the December meeting.