China's rate cut can stem the market fall: Edelweiss

China cut its one-year lending rate by 25 basis points to 4.6 percent effective Wednesday. This is the fifth time the Bank has cut rates since it first began cutting r Interest ates in November'14.

This moves comes just 10 hours after People's Bank of China auctioned 150 billion yuan ($23.4 billion) of seven-day reverse-repo. The central bank also decreased interest rate earned on deposits by 25 basis points to 1.75 percent. Required reserve ratio was also lowered by 50 basis points for all banks.

Market Reaction:

This interest rate cut has the potential to stem the severe fall witnessed in markets in the last three days. Immediately following the announcement US and German 10-yr bonds which were rising on back of risk aversion snapped back with emerging market bonds and equity indices witnessing a pullback from last two days selling. US and German index futures also witnessed gains wiping off Monday's steep decline.

Impact on India Markets:

The most important change was witnessed in India 10-year Yield and USDINR post this announcement. The 10-year government benchmark yield declined nearly 7 basis points after this announcement. US Dollar fell against the Rupee to give up gains for last two sessions. Most equity indices are completely oversold. In fact some of the indices are witnessing oversold reading not seen since last 5 years.

Concurrently RBI released the minutes of consultation with Technical Advisory Committee (TAC) on Monetary Policy. It highlighted that during the last monetary policy 4 out of 7 member recommended a rate cut. Out of the 4 members favouring a rate cut, 1 favoured a cut of 50 bps. This clearly suggest that RBI is much closer to cutting rates than earlier expected.

The above two data points put together has the potential to provide some strength to the markets. The Nifty's low of 7660 could provide support if held. A move above 8000 may fuel a rebound towards 8250 to 8300 range.



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The author is Chief Market Strategist, Edelweiss Financial Services