Equity markets on Thursday shrugged off the rate cuts that the Reserve Bank of India (RBI) effected the day before as indices fell sharply, ignoring a rally in some Asian markets, led by China saying it was targeting 8% growth this year.
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Sensex, the bellwether 30- stock index of the Bombay Stock Exchange, shed 248 points, or 2.94%, to close at 8,197.92, a level last seen in November 2005. The broad-based 50-stock S&P CNX Nifty index on the National Stock Exchange lost 2.59% to close at 2,576.7.
This is the steepest fall Sensex has seen a day after a rate cut since the Indian banking regulator started slashing policy rates in October. On three of the five previous occasions when the central bank had cut rates, the markets rose.
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Rate cuts typically boost the market as lower interest rates spur demand in sectors such as automobiles and real estate and prop up a sagging economy. Lower interest rates also bolster bank’s treasury income as bond prices go up and yields drop.
However, the market seemed unconvinced about any immediate arrest of the economic slowdown by the central bank’s action.
“Banks are not keen on lending. With the reverse repo cut, their options for making money is restricted,” said Waqar Naqvi, chief executive of Taurus Asset Management Co. Ltd, which manages some Rs215 crore. “That could see them making more losses.”
Till now, banks were earning 4% by parking excess funds with RBI.
Since the interest rate on such funds has been slashed to 3.5%, banks’ earnings will go down to that extent.
Risk-averse banks have not been giving loans to corporations and individuals and the year-on-year growth on bank credit has dropped to around 19.5% from around 30% in the past few years.
No wonder then that the banking stocks lost the most with the representative index, the BSE Bankex, dropping 4.56%. This fall was led by a 5.17% fall in ICICI Bank Ltd, India’s second largest lender. ICICI Bank has lost close to 18% in past four trading sessions on reports of its shaky investments in Russia.
A recent CLSA Asia-Pacific Markets report said the bank’s Russian subsidiary ICICI Bank Eurasia “may face some mark to market losses and NPLs (non-performing loans) on its assets in Russia”. Market to market is an accounting practice of valuing an asset on current market price rather than the cost at which it was bought.
An ICICI Bank spokesperson said: “Eurasia’s loans to customers are not material for ICICI group and the net NPLs are negligible in this portfolio.”
India’s most valued firm, Reliance Industries Ltd, fell 5% to Rs1,149.10. It has a 15.42% weightage on the Sensex.
“The rate cut was routine,” said Monal Desai, vice-president and head of institutional derivatives at brokerage Prabhudas Lilladher Pvt. Ltd. He noted that the markets would have already factored this into stock prices and Thursday’s drop was purely due to selling pressure.
Foreign institutional investors, considered the key drivers of Indian markets, sold at least $110 million (Rs573.1 crore) worth of shares to meet redemption pressures, brokers said. Overseas investors had sold $125 million of equity assets on Tuesday when the market had pierced a previous three-year bottom.
Another analyst noted that most FIIs were overweight on banking stocks, which make up some 15-17% of the portfolios of most domestic mutual funds. “Everywhere, the sector is in deep trouble,” said Lalit Thakkar, director at Angel Broking Ltd. “So, now they (FIIs) are paring their exposure in this sector.”
Other sectors which declined were oil and gas, power, consumer durables and fast moving consumer goods. Consumer goods firm Hindustan Unilever Ltd fell 4.4% after JPMorgan Chase and Co. cut its rating citing weak economic growth.
Graphic by Paras Jain / Mint