Home > Markets > Stock Markets > Markets fall as RBI’s words of caution spook investors

MUMBAI : Indian stock market, Indian markets, stock market, RBI, monetary policy review Shaktikanta Das, corona macroeconomic impact, covid-19 outbreak, The BSE Sensex, NSE Nifty, interest rate transmission,

The Indian stock market fell after the Reserve Bank of India’s (RBI) surprise monetary policy review on Friday, with investors wary after central bank governor Shaktikanta Das highlighted the macroeconomic impact of the covid-19 outbreak, adding that “risks to growth were acute". Weakness in global markets also weighed on sentiment. The BSE Sensex ended at 30,672.59, down 260.31 points, or 0.84%. The Nifty closed at 9,039.25, down 67 points, or 0.74%.

The RBI slashed the repo rate by 40 basis points to 4% and adjusted the reverse repo rate from 3.75% to 3.35% to spur economic growth. Given the uncertainties, GDP growth in 2020-21 is estimated to remain in negative territory, with some rise in growth impulses from the second half of the fiscal year, said Das. “The monetary policy committee is of the view that the macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated," he said.

The central bank’s decision to refrain from estimating GDP growth is a reflection of the complexity and the limitations of the present growth models, said analysts. However, a key takeaway was that the stress in the banking sector will continue, analysts said.

“The commentary of the governor’s speech underpins the low prospects of a V-shaped recovery. The commentary indicates that the stress in the economy on both demand and supply is likely to continue. We also believe the government should provide subvention on existing loans or bear some cost of the haircut of existing loans. This will ensure that banks have more confidence in lending to lower-rated entities or individuals," said Abhimanyu Sofat, head, research, IIFL Securities.

There is also a growing worry that transmission of lower interest rates is unlikely to be over soon, as the overall financial condition remains compromised, with the economy grappling with supply-related issues.

Rising risk perception is holding back monetary transmission; so, rate cuts will not be effective, said Prithviraj Srinivas, economist, Axis Capital. “Excess liquidity in the banking system and a fall in money market rates and some lending rates are not the barometers of improving financial conditions in this situation. Liquidity needs to reach every part of the economy, even when it has become difficult to distinguish between good and bad credit. We believe the RBI and the public sector will need to be ready to become lenders of last resort, not just for banks but for all financial institutions," he said.

Banking stocks were the worst hit on Friday because of fears that the RBI’s extension of loan moratorium by three months will burden the balance sheets of banks. The RBI also announced other measures to ease stress in the financial sector and real economy.

Sovereign bonds saw a jump after the rate cuts by RBI. The yield on the most traded 2029 gilts dropped 7 basis points to 5.96% at close. The rupee lost 0.44% to end at 75.96 against the dollar.

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