Conventional nostrums of rate cuts providing temporary succour to rate-sensitive stocks were swept away on Thursday, as banking and realty stocks fell along with the rest of the market. And indeed, why not? There has been no dearth of rate cuts in the past few months, yet that hasn’t stopped the market sliding slowly and steadily lower. In fact, the BSE Bankex was the worst performer among the BSE sector indices on Thursday.
Redemption by hedge funds, the discovery of new holes in the balance sheets of banks in the West, cracks in the domestic economy and a sharp fall in the currency have more than outweighed any impact the rate cuts might have had.
Also See Bourses Slide (Graphic)
Citigroup has a research note on what happens to bank stocks after a policy rate cut. Here’s their conclusion: “Repo rate cuts have a positive impact on stocks—but only marginal. Banks have outperformed by an average +2% in one month post such cuts (PSU banks slightly better at +4%). Importantly in three of the past four instances stocks have outperformed one month before the cuts (underperforming one month after cuts) suggesting that the market has been increasingly efficient in anticipating possible rate cuts.” In other words, perhaps the rate cuts had already been discounted. But then, the Bankex has done much worse than the Sensex in the past month, as realization has seeped in that last quarter’s windfall gains from falling government bond prices will not be repeated and as a weakening economy increases bad loans.
Graphic by Paras Jain / Mint
Write to us at email@example.com