Home > Markets > Stock Markets > Markets snub RBI rate cuts; rate sensitive stocks decline

MUMBAI: Indian stock markets declined on Friday even as the Reserve Bank of India on Friday slashed repo rate by 40 basis point to 4% and adjusted the reverse repo rate to 3.35% from 3.75%. Governor Shaktikanta Das said India's GDP growth is likely to remain in the negative territory in 2020-21 due to disruptions led by covid-19.

At 11:06 am, the BSE Sensex was at 30,525.54, down 407.36 points or 1.32%, while the 50-share index Nifty was at 8,982.45, down 123.80 points or 1.36%. Banks and other rate sensitives have declined after the RBI announcement. BSE Bankex, BSE Auto, BSE Realty were down 1-3%.

Analysts said the fact that the central bank has refrained from giving a GDP growth figure is a reflection of the complexity in giving projections with the present growth models. A takeaway from the policy announcement is that the stress in the banking sector will continue, said analysts.

"By cutting the repo rate and reverse repo rate, RBI aims to inject more liquidity into the system. However, more importantly, what is needed is to remove the risk averseness as there is substantial liquidity in the banking sector," said Deepthi Mathew, economist, Geojit Financial Services said.

"The rising food inflation rate could be a challenge to the RBI as it is following the inflation targeting regime. Similarly, the extension of the moratorium would bring in some relief to the borrowers, but it can put pressure on the bank's balance sheet," Mathew added.

According to Joseph Thomas, head of rResearch, Emkay Wealth Management the further cut in the repo rate by the RBI is more or less in line with expectations by majority of the market participants. “In view of the large issues at the primary for the rest of the year from both central and state governments, the likely gains at the long end may come with elevated risks. The fall in the reverse repo rate would serve as a disincentive to banks who hold huge sums of liquidity to look at alternatives including gilts."

Naveen Kulkarni, chief investment officer, Axis Securities feels the rate cut will have limited impact in the short term, but it is helpful to revive growth over the longer term. “Decision to extend the moratorium period by another 3 months is a significant negative for the private banks both in the medium and long term. The impact on the banking sector will be negative," he said.

The volatility index or VIX has risen over 2% indicating higher anxiety and fear among investors.

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