Mumbai: Equities have been under selling pressure on Friday even as Reserve Bank of India (RBI) reduced key interest rates in-line with markets expectations. Investors are cautious as the central bank has lowered its growth forecast for the fiscal year 2019-2020 to 6.1% from 6.9% earlier. Also, the monetary policy committee (MPC) noted that risks to growth have emerged due to weak domestic demand and sagging export prospects on account of continuing trade tensions.
At 2:10 pm, the Sensex was at 37,846.74, down 260.13 points, or 0.68%, while the Nifty was at 11,227.10, down 86.90 points or 0.77%.
Gaurav Dua, Head, Capital Market Strategy and Investments, Sharekhan by BNP Paribas said that despite the rate cut and the dovish commentary, equity markets have reacted negatively because RBI’s focus on quick transmission of lower interest rates would put pressure on margins of banks. “Also, the economic growth outlook remains concerning despite the 135 basis points (bps) policy rate cuts in 2019 and there is limited elbow room with RBI now to further take monetary actions to support the economy. Given the domestic slowdown and global uncertainties it would be wise to be very selective in stock picking at the current juncture."
The RBI has cut repo rate, rate at which banks borrow from central bank, for the fifth consecutive time. Consequently, the repo rate stands at 5.15% now. “While the recent measures announced by the government are likely to help strengthen private consumption and spur private investment activity, the continuing slowdown warrants intensified efforts to restore the growth momentum. It is in this context that the MPC decided to continue with an accommodative stance as long as it is necessary to revive growth, while ensuring that inflation remains within the target," the RBI said in a statement.
Also watch: RBI cuts repo rate by 25 basis points, fifth cut in this year
However, analysts are still expecting further rate cuts by RBI in upcoming monetary policy review this year.
Amar Ambani, Head of Research – Institutional Equities, Yes Securities said that concerns on the fiscal side on account of lower goods and services tax (GST) revenues and corporate tax cuts possibly dissuaded RBI from a steeper rate cut. “Nevertheless, accommodative policy action from the central bank is quite expected given the deceleration in frequency indicators and protracted slowdown in private consumption. The need of the hour is to revive the economy. In terms of future policy action, there is certainly scope for further rate move given the weak domestic demand conditions accompanied with contained inflation trajectory," he said.
Ambani believes that there is a possibility of another 15 to 30 bps further cut. He sees interest rates falling significantly, looking at high real rates and scope for fall in credit spread as well as term premium. “Moreover, policy transmission will eventually take place, which has not been yet materialized optimally. We see 10 year yields in the range of 6.3-6.7%," Ambani added.
The RBI’s retail inflation projection is revised slightly upwards to 3.4% for second quarter of 2019-20, while projections are retained at 3.5-3.7% for second half of 2019-20 and 3.6% for first quarter of 2020-21, with risks evenly balanced.
K Joseph Thomas, Head Research, Emkay Wealth Management said that the RBI has once again proved to be well ahead of the curve in unleashing monetary efficacies to combat the economic slowdown, in perfectly complementing the fiscal initiatives, with the cut of 25 bps- bringing down the repo rate to 5.15 % . “In conformity with this aggressive approach, RBI is likely to continue with its campaign for more rapid transmission of the benefits to credit users, through lower rates to a large extent linked to the base rate. There may be further cuts in the rate in the light of the GDP growth forecast being lowered form 6.90 % to 6.10 % for FY 20. We need to see more action from the government for a consumption-led recovery," he said.
Mahendra Jajoo- Head-Fixed Income, Mirae Asset Global Investments also agrees. “Further rates cuts may be expected in forthcoming policy reviews. While money market rates eased in response, bond yields inched up slightly as traders remain apprehensive of larger than currently scheduled borrowings by government. Markets will now look forward to any possible OMO purchase operations to get comfort on absorption of additional supplies if any. We expect over all bond yields to remain range bound with easing bias," Jajoo said.
BSE Bankex is down 1.66% while stocks such as SBI, Axis Bank, ICICI Bank, Kotak Mahindra Bank, HDFC Bank, are down 2-3%.