Indian stock markets closed lower on Friday dragged by financial heavyweights, as the Reserve Bank of India's (RBI) surprise rate cut and extension of moratorium for borrowers failed to cheer investors.
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%.
Investors remained worried after the RBI governor Shaktikanta Das cautioned about the macroeconomic impact of coronavirus outbreak adding that ‘risks to growth are acute’. Weakness in global markets also weighed on the investor sentiment.
The RBI slashed repo rate by 40 basis point to 4% and adjusted the reverse repo rate to 3.35% from 3.75% to spur economic growth in the country. Given all these uncertainties, gross domestic product (GDP) growth in 2020-21 is estimated to remain in negative territory, with some pick-up in growth impulses from second half of 2020-21 onwards, said Das. “The monetary policy committee (MPC) is of the view that that macroeconomic impact of the pandemic is turning out to be more severe than initially anticipated," he said.
Analysts said that the fact that the central bank has refrained from giving a gross domestic product (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, they feel.
Abhimanyu Sofat, Head of Research, IIFL Securities said, “The commentary of the governor speech underpins the low prospects of a V shaped recovery. RBI commentaries indicate the stress in the economy on both demand and supply is likely to continue. We also believe government should provide subvention on existing loans or bear some cost of the haircut of existing loans. This would ensure more confidence to banks to lend to lower rated entities or individuals."
There is also a widespread growing worry that transmission of lower interest rates is unlikely to be over soon as overall financial condition remains compromised with majority of economy grappling with supply-related issues.
Prithviraj Srinivas, Economist, Axis Capital believes rising risk perception is holding back monetary transmission and hence rate cuts will not be effective. “Excess liquidity in the banking system and 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 credit and bad credit. We believe that the RBI/public sector will need to stand ready to become lender of last resort, not just for banks, but all financial institutions," he said.
Bank stocks were worst hit in trading session on Friday due to rising fears that RBI’s extension of loan moratorium to another three months will be a burden on balance sheets of banks. The RBI also announced a slew of other measures to ease stress in the financial sector and real economy.
According to Navneet Munot, ED and Chief Investment Officer (CIO), SBI Mutual Fund, credit spreads are highly elevated but they also reflect the economic uncertainty and constraints in the financial system. He feels that the equity markets in near term will continue to be driven by cues from global markets and the evolution of health crisis and economic situation.
Sovereign bonds saw a jump after rate cuts announced by RBI. The yield on the most-traded 2029 bonds dropped seven basis points to 5.96% at the close. The Indian rupee lost 0.44% to end at 75.96 against dollar.
Meanwhile, markets in other Asian region weakened with deep cuts in Hong Kong. Markets in Hong Kong slipped nearly 6%. China is poised to impose a new national security law on Hong Kong after months of anti-government protests in the Chinese-ruled city. There are concerns that China may be tightening its grip on Hong Kong and it may trigger another wave of pro-democracy protests. The draft law was announced at the annual National People’s Congress (NPC), the Chinese parliament, which kicked off on Friday. Markets in China, Japan and Korea were down over 1%.