Sensex falls after RBI disappoints

It could not have been a more surprising day for traders in the domestic equity market. The mood on the street was upbeat and the BSE benchmark Sensex began on a high note. It rose 160 points in morning trade as (outgoing) Finance Minister Pranab Mukherjee had announced on Saturday regarding prospective “big measures” to be announced on Monday by the Reserve Bank of India (RBI), to boost the sagging economy. However, all excitement vanished when the measures were announced on Monday.

The Sensex fell 0.53 per cent or 90 points to close at 16,882 and the concluding session of the trading day was filled with disappointment. The broader index S&P CNX Nifty lost 0.61 per cent at 5,144. Shares of the country’s largest lender State Bank of India were among the top losers, apart from a sharp fall across other blue chip counters. RBI’s announcements were bereft of any near-term triggers for the market.

“Well, not the shock and awe the market was looking for but we shall see what else is announced. Not surprised to see USD/INR higher,” said Jonathan Cavenagh, senior forex strategist at Westpac in Singapore.

RBI said it was raising the limit of foreign investment in government bonds by $5 billion to $20 billion and took other relatively minor steps, against investors hope of more structural reforms. It was widely expected that long-term boost to foreign investments may be provided or the central bank may at least take steps to improve dollar demand from oil companies, which could have had a larger impact.

“I find it a little silly that the finance minister announced on Saturday that a big boost for the economy was coming on Monday. The announcements were not that heavy-duty. Markets were disappointed as it turned out to be a case of over commitment versus ability to deliver,” said Kishor Ostwal, managing director, CNI Global Research.

Other measures announced by the central bank included a reduction in lock-in restrictions on some government bonds for foreign investors, and the opening of investment in debt securities to more types of foreign buyers. The rise in ECB and G-Sec limits will be positive for rupee in the long term but are unlikely to have any immediate impact on the equity markets.

"The single largest factor that will impress the equity markets and foreign investors will be measures to bring down the fiscal deficit. This was not addressed today," said Gautam Trivedi, Managing Director and Head of Equities, Religare Capital Markets.

India was seen as failing to deliver on Monday, though sentiment did get support after Moody's Investors Service maintained a "stable" outlook on rating today. That denoted a more optimistic view after both Standard & Poor's and Fitch Ratings had cut their sovereign outlook for India to "negative."

The banking sector as measured by the Bank Nifty fell 1.1 per cent. State Bank of India fell two per cent, while HDFC Bank lost 1.41 per cent. ONGC fell 2.5 per cent, after closing on Friday at its highest level since March 15. Tata Steel fell 0.9 per cent. Credit Suisse downgraded the stock to “under perform” from “neutral”, while maintaining its target price at Rs 340, saying valuations were no longer “supportive”.

Index heavyweight Reli-ance Industries rose 0.73 per cent after Moody's said the long-term fundamentals of the company remained intact despite weak macro outlook. Suzlon Energy rose two per cent after a senior company official said it expected to tie up $300 million in loans from banks by the end of June to repay its foreign bondholders, raising hopes the wind turbine maker would meet its commitments.

In Asia, the Hang Seng was down 0.5 per cent and the Nikkei fell 0.71 per cent. In Europe, FTSE was down 0.68 per cent, DAX 1.7 per cent and STOXX 50 fell 1.9 per cent on Monday.