A highly volatile and eventful trading session ended on a flat note on Tuesday. Market sentiment was hit with a slew of negative surprises after the Reserve Bank of India in its policy meeting unexpectedly raised benchmark repurchase rate by 25 basis points to 8% from 7.75%. The benchmark indices along with the BankNifty plunged sharply after the monetary policy was announced but managed to recover thereafter.
Commenting on the same, Amar Ambani, Head of Research at IIFL said, “Although the RBI Governor’s decision to raise the Repo and MSF rate came as a surprise, in hindsight, it seems like the right move. While headline inflation has seen moderation, the elevated level of core CPI in recent months is a worry. A rate hike of 25bps at this juncture was required to stem upside risks to the central banker’s CPI forecast of 8% by January 2015. In its recent policies, RBI has been laying more emphasis on CPI as an inflation benchmark. The Repo rate now stands at 8% and the MSF rate at 9%; CRR was left unchanged. While there was no mention about the impact on the INR in RBI’s policy document, a hike in rates, does send a strong signal to the currency market at a time when emerging market currencies are weakening.”
“RBI also clearly mentions that further policy tightening in the near term is not anticipated if disinflationary process evolves according to its projections and that policy can only turn accommodative if inflation moderates at a pace faster than currently anticipated. In our view, this implies that a sustained fall in CPI below 8% becomes a pre-requisite for a change in policy stance. So while the rate cycle could have peaked it would take some time to turn downwards. As we now expect the pause to be a long one - we moderate our expectation of rate cut in FY15 to 50-75 basis points. Banks are unlikely to raise lending rates in policy response as the growth in deposits has been much higher than advances.
From a stock market perspective, the commentary on economic growth would be worrisome where the Governor’s assessment is that growth is likely to lose momentum in Q3 of 2013-14,” added Amar Ambani.
If the RBI shocker was not enough index heavy weight Maruti played another spoil sport. Shares of Maruti plummeted by 10% to close at Rs. 1543 after the company’s local sales of passenger vehicles fell 5.7% in the nine months ended December, set for the biggest annual decline in a decade.
Maruti also said that its proposed factory in Gujarat would be built by parent Suzuki Motor as a wholly owned facility. This plant would make and sell vehicles solely for Maruti Suzuki.
Among the BSE sectoral indices, the telecom, IT, banking and the healthcare stocks were among the top losers, On the other hand, metals, realty and the FMCG stocks were among the top gainers. Even the small-cap stocks witnessed some buying.
Finally, BSE Sensex closed at 20,683 down 24 points, while NSE Nifty closed at 6,126 down 10 points over the previous close. Maruti, Axis Bank, Lupin, Sun Pharma, Cipla, IndusInd Bank, Infosys and Hindustan Unilever were among the top losers in the Nifty.
Commenting on the same, Amar Ambani, Head of Research at IIFL said, “Although the RBI Governor’s decision to raise the Repo and MSF rate came as a surprise, in hindsight, it seems like the right move. While headline inflation has seen moderation, the elevated level of core CPI in recent months is a worry. A rate hike of 25bps at this juncture was required to stem upside risks to the central banker’s CPI forecast of 8% by January 2015. In its recent policies, RBI has been laying more emphasis on CPI as an inflation benchmark. The Repo rate now stands at 8% and the MSF rate at 9%; CRR was left unchanged. While there was no mention about the impact on the INR in RBI’s policy document, a hike in rates, does send a strong signal to the currency market at a time when emerging market currencies are weakening.”
“RBI also clearly mentions that further policy tightening in the near term is not anticipated if disinflationary process evolves according to its projections and that policy can only turn accommodative if inflation moderates at a pace faster than currently anticipated. In our view, this implies that a sustained fall in CPI below 8% becomes a pre-requisite for a change in policy stance. So while the rate cycle could have peaked it would take some time to turn downwards. As we now expect the pause to be a long one - we moderate our expectation of rate cut in FY15 to 50-75 basis points. Banks are unlikely to raise lending rates in policy response as the growth in deposits has been much higher than advances.
From a stock market perspective, the commentary on economic growth would be worrisome where the Governor’s assessment is that growth is likely to lose momentum in Q3 of 2013-14,” added Amar Ambani.
If the RBI shocker was not enough index heavy weight Maruti played another spoil sport. Shares of Maruti plummeted by 10% to close at Rs. 1543 after the company’s local sales of passenger vehicles fell 5.7% in the nine months ended December, set for the biggest annual decline in a decade.
Maruti also said that its proposed factory in Gujarat would be built by parent Suzuki Motor as a wholly owned facility. This plant would make and sell vehicles solely for Maruti Suzuki.
Among the BSE sectoral indices, the telecom, IT, banking and the healthcare stocks were among the top losers, On the other hand, metals, realty and the FMCG stocks were among the top gainers. Even the small-cap stocks witnessed some buying.
Finally, BSE Sensex closed at 20,683 down 24 points, while NSE Nifty closed at 6,126 down 10 points over the previous close. Maruti, Axis Bank, Lupin, Sun Pharma, Cipla, IndusInd Bank, Infosys and Hindustan Unilever were among the top losers in the Nifty.
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