BackRBI’s rate cuts did little to help markets
Since January 2015, the Sensex has fallen by 10.77%; rate sensitive sectors, such as banks and real estate, have fallen even more
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Even though the Reserve Bank of India (RBI) has reduced interest rates relatively steeply in the past year, the rate cuts have done little to help the equity market which continues to struggle against the backdrop of global volatility and sluggish earnings growth. On Tuesday, RBI kept benchmark rates steady but indicated that monetary policy remains “accomodative".
The markets, though, have not taken much comfort from lower interest rates, which are typically seen as positive for equities.
Since January 2015, RBI has cut rates by 125 basis points. Over this period, the BSE’s benchmark Sensex has fallen by 10.77%. Rate sensitive sectors, such as banks and real estate, have fallen even more than the benchmark Sensex. One basis point is one-hundredth of a percentage point.
“On the global macro front, things haven’t been good with China slowdown woes and oil tumbling. This has been dragging down world markets at large and India has been no exception," Vaibhav Sanghavi, managing director of Ambit Investment Advisors Pvt. Ltd.
From the start of January 2015 to date, the BSE Bankex and BSE realty indices have dropped 20.5% and 23.4%. The BSE Auto index has erased 10.1%.
Sanghavi pointed to the sector-specific problems faced by banks and real estate to explain their under-performance.
“For banks, the legacy books with the pile of NPAs (non-performing assets) have been a bother. As far as the realty sector is concerned, the prices have already been high, and likelihood of further appreciation from here is less. Also, what is more worrisome is that real estate companies are heavily leveraged," said Sanghavi.
While the problem of poor asset quality, largely weighs on the state-owned banks, which account for 70% of the credit in the system, private banks too, are not completely insulated. ICICI Bank Ltd, for instance, reported a 33% increase in gross bad loans in the December ended quarter compared to the September quarter.
Seven of the 10 stocks in the BSE Bankex have declined since the start of 2015 to date. State-run lender Punjab National Bank eroded the most value, with a 59% decline. The country’s largest lender, State Bank of India, has seen its shares fall 46%.
Among the constituents of the realty index, nine of the 13 stocks have declined, with Unitech Ltd seeing the steepest fall of 67%.
“Autos are relatively better placed, with demand making an uptick. Their performance is pretty much in line with broader market," said Sanghavi.
Of the BSE Auto index constituents, which includes auto makers as well as auto component makers, eight of the 14 companies declined, even as the index moved largely in line with the broader market.
“Also, banks haven’t transmitted the rate cuts at a good pace, which has not helped the rate sensitives," said Nilesh Shah, managing director of Kotak Mahindra Asset Management Co. Ltd. He also flagged-off concerns surrounding the asset quality of banks.
“Rate cut cycle that has not immediately helped sectors like banking due to the NPA problem. However, autos and housing NBFC (non-banking financial companies) have benefitted," said Shah adding that markets often rally ahead of actual interest rates being announced.
During the previous interest rate reduction cycle, between March 2012 and July 2013, the Sensex had advanced 11.7%. Although even then, rate sensitives had underperformed. The rate cut cycle prior to this, between April 2008 to March 2009, when the cuts spanned to 400 bps, is not comparable as the period was marked by the global financial crisis. Some analysts also believe that the benefits of rate cuts percolate down to individual firms and sectors over a period of time, particularly when the economy is weak.
“Rate cut cycle typically happens when the economy is weak, or not in the best of shape. Some of the benefits tend to accrue with a lag. Also, interest rate transmission has been slow," said Gautam Chhaochharia, head of research at UBS Securities India Pvt. Ltd.
Like others, Chhaochharia points to global factors such as the China slowdown and lack of an earnings recovery to explain the lack of a positive reaction from the markets to lower interest rates in the economy.
To be sure, it is not just the equity markets that have failed to respond positively. Even in the bond markets, which are more directly correlated with interest rates, bond yields are almost at the same level as they were when the RBI started cutting rates. On Tuesday, the benchmark 10-year bond traded as 7.852% compared with 7.73% at the start of January 2015. The previous rate cut cycle between March 2012 and July 2013, the then 10-year bond traded at 8.169% at the end of the cycle, compared to 8.23% at the start of the cycle.
“Bond yields actually move in anticipation of the rate cut. So when it actually happens, there is not much of reaction," Chhaochharia said. Currently, they are also reflecting concerns on what is happening across the global bond markets and the fiscal stance of the government, added Chhaochharia. The markets are watching to see whether the government will stick to the stated path of fiscal consolidation or defer it in order to provide a stimulus to the economy.
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