RBI maintains status quo; what next for the markets?

Analysts believe that as seen on the previous two occasions in 2015, the rate cuts need not be confined to policy meetings and RBI will wait for inflation data and transmission of the cuts in January and March before cutting rates further.

For a second time in a row, the markets gave a muted reaction to the Reserve Bank of India (RBI)’s review of the monetary policy stance.

On Tuesday, RBI, in its first bi-monthly policy statement for 2015-16, kept the repo rate unchanged at 7.5 per cent.

Contrary to expectations, the cash reserve ratio (CRR) was also kept unchanged at four per cent.  

The benchmark indices – the S&P BSE Sensex and the CNX Nifty – lost nearly one per cent each in intra-day deals  but recovered the lost ground to end flat at 28,517 and 8,660 levels, respectively.  

In March, the S&P BSE Sensex and the CNX Nifty had ended the day 0.7 per cent and 0.8 per cent lower at 29,381 and 8,923 levels, respectively, after hitting 30,000 and 9,100 levels in intra-day deals.

The CNX PSU Bank Index, too, had touched an intra-day high of 4,065 but lost nearly seven per cent to end the day at 3,784 levels, a loss of around three per cent from its previous close.

On Tuesday, while interest rate-sensitive stocks (automobile, banks and real estate) lost ground in intra-day deals, they later recovered partially.

The CNX Realty Index was the worst hit and ended 1.7 per cent lower, after slipping nearly 2.3 per cent intra-day.

Market outlook

According to RBI, transmission by banks of its rate reductions earlier this year, food prices and progress of the monsoon, acceleration of policy efforts, including progress on stalled investments and signs of normalisation of US monetary policy will guide policy actions.  

What does all this mean for the markets? How are they interpreting RBI’s statements and what is the road ahead?  

Analysts believe that as seen on the previous two occasions in 2015, the rate cuts need not be confined to policy meetings and RBI will wait for inflation data and transmission of the cuts in January and March before cutting rates further.

However, over the next 12 months, it will cut rates frequently, but in small doses.

“The total magnitude of rate cut could be 100 bps over the next 12 months. We don’t expect a huge spike in inflation, despite the unseasonal rains over a longer period of time,” said Taher Badshah, senior fund manager and co-head of equities at Motilal Oswal AMC.  

“We remain reasonably positive on the markets. They might remain range-bound for a while from here on, but any sharp cuts are not likely.

The market direction will be guided by corporate earnings, especially the oil & gas companies, since they were responsible for earnings disappointment in the past quarter as well,” he adds.  

U R Bhat, managing director, Dalton Capital Advisors suggests some participants were expecting a cut in the CRR.

Given the developments and the coming results season, he expects the Nifty to remain range-bound for the next three to six months at 8,300–8,800.  

On rate-sensitive stocks, K Subramanayam, co-head, equity advisory at Altamount Capital advises that investors should not base their investment decision solely on the possibility of a cut in interest rates, but should invest selectively after analysing performance in the March quarter and the road ahead.  

“In case the results are good, we could see some buying in rate-sensitive stocks.

One can’t really base an investment decision solely on RBI’s policy. In the automobile sector, Tata Motors and Ashok Leyland look good.

For the rest, it is better to wait for the March quarter results.

While it is too early to comment on the likely performance of companies in real estate, the next two – three quarters will be critical for the banking sector.

I would prefer to take a contrarian call on some public sector banks. In case the results are bad and these stocks see a huge drop, maybe one can do some bottom fishing here,” he says.

Image: People look at a screen displaying the Sensex on the facade of the Bombay Stock Exchange (BSE) building in Mumbai.

Photograph: Shailesh Andrade/Reuters