Sensex shrugs off lower inflation forecast, slides 1% on global cues

Mumbai: Markets ended nearly 1% lower on Wednesday despite the Reserve Bank of India (RBI) keeping key interest rates unchanged, along expected lines, and forecasting a drastic reduction in inflation. Weak global cues also dragged the Indian markets. The Sensex ended at 35,884.41, down 249.90 points, or 0.69%, while the Nifty closed at 10,782.90, falling 86.60 points, or by 0.80%. Rate-sensitive sectors such as banks and autos fell, with the BSE Auto down 2.40% and the BSE Bankex down 1% during the day.

While maintaining its “calibrated tightening” stance, the monetary policy committee (MPC) slashed its inflation projection from 3.9-4.5% to 2.7-3.2% for the second half of 2018-19, taking into account the fall in food inflation, crude prices and the appreciating rupee. The RBI expects inflation to rise to 3.8-4.2% in the first half of 2019-20.

Analysts said investors were disappointed that the cut in inflation forecast by the central bank should have ideally led to a lesser hawkish monetary policy.

V.K. Vijayakumar, chief investment strategist, Geojit Financial Services, said that though the policy rates and stance remained unchanged, the macro environment and the message that the central bank conveyed is that it is likely to be on a prolonged pause in rates.

“The crude crash has ensured that inflation will remain well within RBI’s comfort zone. Financing the current account deficit (CAD) will not be a worry since foreign portfolio investment (FPI) inflow has resumed after the dovish message from the Federal Reserve and marked deceleration in US bond yield. We feel there is no possibility of a rate hike anytime soon; nor is the central bank likely to oblige with a rate cut.”

However, according to Abhimanyu Sofat, head of research, IIFL Securities, if one sees continued benign data on inflation front, then one can hope for increased liquidity from the RBI to support credit growth.

Among global markets, European and Asian stocks fell following a rout on Wall Street, after China pledged to start delivering on trade agreements reached with America.

Meanwhile, government 10-year bond yields fell over 13 basis points to hit a 8-month low after the RBI said that it may need to extend its open market bond purchases until March. The 10-year government bond yield closed at 7.441%, a level last seen on 13 April, from its previous close of 7.573%. Bond yields and prices move in opposite directions.

Analysts expect more volatility in equities with key events lined up this month. Of the three key events in December, the trade truce between US-China, and the RBI monetary policy, has played out without any damage. The Organization of the Petroleum Exporting Countries (Opec) meeting on Thursday on crude oil, and the outcome of the state elections are critical events. Crude prices have fallen around 28% since October. High crude prices had weighed on the markets in 2018, as valuations became steep and the much-awaited company earnings taking longer than estimated.