Market this Week: Two central banks that kept stocks on tenterhooks

US Fed's decision to increase the pace of taper and RBI's 25bps repo rate hike caused stocks to plummet this week

Market sentiment went for a toss this week and benchmark stock indices saw red after a two-punch downer on the domestic and global front. A 25 bps repo rate hike by the Reserve Bank of India (RBI) to eight per cent in its third quarter monetary policy review followed by US Federal Reserve’s decision to increase the pace of tapering its bond-buying programme, proved a double-edged sword for markets this week.

RBI left cash reserve ratio (CRR) for banks untouched at four per cent. The reverse repo rate under the liquidity adjustment facility (LAF) now stands adjusted at seven per cent and the marginal standing facility (MSF) rate and the bank rate at nine per cent.

A day later, outgoing US Federal Reserve Chairman Ben Bernanke, in his parting blow to emerging markets, announced further reduction in the Fed’s monthly bond purchases and signalled further reduction in the coming months. Fed cited a satisfactory growth in the economy along with a pick-up in labour market conditions to be rationale behind increasing the pace of tapering.  It was, however, decided that key lending rates will be kept unchanged at historic low levels till the time inflation remains within comfort levels.

US Fed’s quantitative easing has greatly benefited emerging markets,  as easy liquidity injected by the  Fed found its way to capital markets in countries such as India, Brazil, Russia and China among others. Fed’s monthly purchases of $75 million worth of bonds (in January) have now been reduced to $65 million. The breakup of its monthly bond purchases now stands at $30 billion per month for mortgage-backed securities and $35 billion per month worth buying of treasury-bills, beginning February. Janet Yellen will take charge from Bernanke, she will be sworn in on February 3.

The 30-share Sensex index of the Bombay Stock Exchange (BSE) fell 620 points or 2.9 per cent to 20,514 levels and the 50-unit Nifty of the National Stock Exchange (NSE) closed at 6,090 levels, down 177 points or 2.8 per cent.

In broader markets, the BSE Mid-cap Index was down 2.28 per cent and the Small-cap Index shaved 2.8 per cent, which was slightly better than the benchmarks.

FIIs purchased shares worth Rs 714.30 crore in January as compared to Rs 16,085.80 crore in December 2013.

Market mix

Rate sensitive auto, realty and banking sectoral stock indices of the BSE were hit after an increase in repo rate by RBI. BSE Realty fell 7.3 per cent followed Bankex which was down 6.2 per cent and auto was down 3.2 per cent, BSE Capital goods was relatively safer, falling 1.4 per cent on hopes of improvement in the economy.  

Among banking heavyweights, ICICI Bank fell 6.56 percent after reporting a rise its non-performing asset (NPAs) in December quarter results. Axis Bank, SBI and HDFC Bank ended 6.6-7.2 per cent lower.

In auto pack, Maruti Suzuki remained the top Sensex loser, down 7.74 per cent at Rs 1,635.35 after the company announced plans to expand in Gujarat through a wholly-owned subsidiary of Suzuki Motor Corporation, Japan. Tata Motors fell 5.5 per cent as mood turned sombre as the company’s Managing Director-Karl Slym allegedly jumped to his death from a hotel in Thailand. Hero MotoCorp decelerated 3.18 per cent after reporting a below expectations third quarter results.  

Metal and mining company stocks lost their sheen after the HSBC PMI for China released on Wednesday indicated a sharp slowdown in the economy. China’s appetite for industrial metals sets the trend in their prices. BSE Metal ended 4.7 per cent lower this week. Sesa Sterlite was off seven per cent to close at Rs 188.50, Tata Steel was down 5.4 percent and Hindalco Inds, down 3.9 per cent were other heavyweight losers. 23 shares declined and 27 gained from the Sensex stocks, this week.  

Future course

Market is now expected to track foreign fund flows and the rupee movement after Fed-induced emerging market turmoil sent tremors in emerging market circuit. January manufacturing PMI on Monday and service PMI numbers on Wednesday will be the other data points to keep tabs on. Advance GDP forecast numbers for the current financial year could help set the sentiment, which is expected at sub-five per cent levels.