Equities see broad based decline as IMD downgrades monsoon forecast to 88%

Intraday recovery witnessed in early afternoon trade proved short lived, with key benchmark indices tumbling again in afternoon trade. The latest sharp slide on the bourses materialisd after Earth Sciences minister Harsh Vardhan was quoted as saying that the India Meteorological Department (IMD) has downgraded this year's monsoon forecast to 88% of the long-term average from April forecast of 93% of the long-term average. The downgrade in monsoon forecast comes just hours after the Reserve Bank of India (RBI) Governor Dr. Raghuram G. Rajan said the RBI decided to front-load a rate cut at today's policy and wait for more certainty on both the monsoon outturn as well as the effects of government responses if it turns out to be weak. The RBI cut its benchmark lending rate viz. the repo rate by 25 basis points to 7.25% after a monetary policy review today, 2 June 2015, matching market expectations.

The market breadth indicating the overall health of the market was quite weak, with more than two losers against every gainer on BSE. The barometer index, the S&P BSE Sensex, was currently off 431.67 points or 1.55% at 27,417.32. The BSE Mid-Cap index was off 1.05%. Weakness in Asian and European stocks also weighed on sentiment on the domestic bourses.

Bank stocks edged lower after the Reserve Bank of India (RBI) cut its benchmark lending rate viz. the repo rate by 25 basis points to 7.25% after a monetary policy review today, 2 June 2015, matching market expectations. Index heavyweights ITC, HDFC and Infosys edged lower. Another index heavyweight Reliance Industries edged higher.

Foreign portfolio investors bought shares worth a net Rs 113.47 crore yesterday, 1 June 2015, as per provisional data released by the stock exchanges. Domestic institutional investors (DIIs) bought shares worth a net Rs 49.34 crore yesterday, 1 June 2015, as per provisional data released by the stock exchanges.

In overseas markets, European stocks edged lower amid ongoing uncertainty over Greece's debt situation. Asian stocks edged lower after an encouraging reading on US manufacturing activity in May increased the likelihood that the US Federal Reserve will raise interest rates this year. US stocks ended with modest gains yesterday, 1 June 2015, recovering part of last week's losses in a session marked by cautious trading as investors reacted to mixed economic data.

At 13:15 IST, the S&P BSE Sensex was down 431.67 points or 1.55% at 27,417.32. The index lost 450.22 points at the day's low of 27,398.77 in afternoon trade, its lowest level since 28 May 2015. The index rose 53.54 points at the day's high of 27,902.53 in early trade.

The 50-unit CNX Nifty was down 132 points or 1.57% at 8,301.40. The index hit a low of 8,296.60 in intraday trade, its lowest level since 28 May 2015. The index hit a high of 8,445.35 in intraday trade.

The BSE Mid-Cap index was down 112.05 points or 1.05% at 10,600.38. The BSE Small-Cap index was down 103.87 points or 0.92% at 11,175.91. The fall in both these indices was lower than the Sensex's decline in percentage terms.

The market breadth indicating the overall health of the market was quite weak, with more than two losers against every gainer on BSE. 1,619 shares fell and 797 shares rose. A total of 104 shares were unchanged.

Index heavyweight and cigarette major ITC was off 2.68% at Rs 323.10. The stock hit a high of Rs 329.70 and a low of Rs 322.30 so far during the day.

Another index heavyweight and housing finance major HDFC was off 2.97% at Rs 1,209.70. The stock hit a high of Rs 1,249.80 and a low of Rs 1,209 so far during the day.

Software major Infosys was off 1.48% at Rs 2,015.45. The stock hit a high of Rs 2,054.80 and a low of Rs 2,010 so far during the day.

Another index heavyweight Reliance Industries was up 0.83% at Rs 908.80. The stock hit a high of Rs 918.50 and a low of Rs 891.15 so far during the day.

Bank stocks edged lower after the Reserve Bank of India (RBI) cut its benchmark lending rate viz. the repo rate by 25 basis points to 7.25% after a monetary policy review today, 2 June 2015, matching market expectations.

Among private sector banks, IndusInd Bank (down 2.68%), Axis Bank (down 2.12%), Yes Bank (down 2.09%), Kotak Mahindra Bank (down 1.76%), HDFC Bank (down 1.7%) and ICICI Bank (down 1.61%) edged lower.

The RBI said after a monetary policy review today, 2 June 2015, that commercial banks have started passing through some of the past rate cuts into their lending rates. The growth in bank credit remains subdued. The central bank said that banks should pass through the sequence of rate cuts into lending rates.

Among public sector banks, Union Bank of India (down 5.17%), UCO Bank (down 2.83%), Andhra Bank (down 3.01%), Oriental Bank of Commerce (down 3.22%), IDBI Bank (down 2.47%), Bank of India (down 2.19%), Canara Bank (down 2.5%), State Bank of India (down 2.12%), Central Bank of India (down 0.95%), United Bank of India (down 1.19%) and Punjab National Bank (down 0.81%) edged lower.

The RBI suggested that a targeted infusion of bank capital into scheduled public sector commercial banks is required so that adequate credit flows to the productive sectors of the economy as investment picks up.

Allahabad Bank was off 3.89% at Rs 102.40. Allahabad Bank during market hours today, 2 June 2015, announced that the bank has decided to cut its base rate and benchmark prime lending rate (BPLR) by 30 basis points each, effective from 8 June 2015. Consequently, the base rate will be reduced to 9.95% from existing 10.25% and BPLR of the bank will be reduced to 14.2% from existing 14.5% with effect from 8 June 2015.

The Reserve Bank of India (RBI) cut its benchmark lending rate viz. the repo rate by 25 basis points to 7.25% after a monetary policy review today, 2 June 2015, matching market expectations. The announcement was made at 11:00 IST. The RBI kept the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liabilities (NDTL).

The RBI has raised inflation forecast while trimming growth forecast for the current fiscal year. Inflation based on the consumer price index (CPI) is expected to be pulled down by base effects till August 2015 and will start rising thereafter to about 6% by January 2016, which is slightly higher than the RBI's projections in its April policy review. In its April policy review, the RBI had said that CPI inflation is expected to ease to around 4% by August 2015 and rise therefore to reach 5.8% by the end of the current financial year. The central bank has trimmed its forecast of GDP growth for the current fiscal year to 7.6%, with a downward bias. At its policy review on 7 April 2015, the RBI had forecast GDP growth at 7.8% for the current fiscal year assuming a normal monsoon this year.

India's merchandise export growth has weakened steadily since July 2014 and entered into contraction from January 2015 through April, with a recent shrinking of even volumes exported. Net exports are, therefore, unlikely to contribute as much to growth going forward as they did in the past financial year, according to the central bank. Consequently growth will depend more on a strengthening of domestic final demand.

RBI Governor Dr. Raghuram G. Rajan said in a statement that the RBI decided to front-load a rate cut at today's policy and wait for data that clarify uncertainty. With still weak investment and the need to reduce supply constraints over the medium term to stay on the proposed disinflationary path, a more appropriate stance is to front-load a rate cut today and then wait for data that clarify uncertainty, Rajan said. The agricultural activity was adversely affected by unseasonal rains and hailstorms in north India during March 2015, impinging on an estimated 94 lakh hectares of area sown under the Rabi crop. Successive estimates have been pointing to a worsening of the situation, with the damage to crops like pulses and oilseeds -- where buffer foodstocks are not available in the central pool -- posing an upside risk to food inflation. For the Kharif season, the outlook is clouded by the first estimates of the India Meteorological Department (IMD), predicting that the southwest monsoon will be 7% below the long period average. This has been exacerbated by the confirmation of the onset of El Nino by the Australian Bureau of Meteorology.

Among other risks to inflation, crude prices have been firming amidst considerable volatility and geo-political risks are ever present. The RBI also said that volatility in the external environment could impact inflation. Therefore, a conservative strategy would be to wait, especially for more certainty on both the monsoon outturn as well as the effects of government responses if it turns out to be weak.

India's foreign exchange reserves are currently placed at around $350 billion, providing a strong second line of defence to good macroeconomic policies if external markets turn significantly volatile.

Meanwhile, data released by the government after trading hours yesterday, 1 June 2015, showed that the output of eight core infrastructure sector, carrying 38% weight in the Index of Industrial Production, declined 0.4% in April 2015.

Earth Sciences minister Harsh Vardhan was quoted as saying today, 2 June 2015, that the India Meteorological Department (IMD) has downgraded this year's monsoon forecast to 88% of the long-term average from April forecast of 93% of the long-term average. The downgrade in monsoon forecast has sparked fears of a drought in the country where nearly half of farmland lack irrigation facilities.

The onset of monsoon in Kerala has been delayed. The IMD yesterday, 1 June 2015, said that conditions are becoming favourable for the onset of southwest monsoon over Kerala around 5 June, four days after the scheduled onset date of 1 June.

In global commodity markets, Brent crude oil futures edged higher today, 2 June 2015. Brent for July settlement was up 48 cents at $65.36 a barrel. The contract had lost 68 cents or 1.03% to settle at $64.88 a barrel during the previous trading session.

Oil cartel OPEC is expected to keep its production target of 30 million barrels of oil per day unchanged at a meeting scheduled in Vienna on Friday, 5 June 2015. The OPEC meeting is being closely watched for clues about the organization's next moves.

In overseas markets, European stocks edged lower today, 2 June 2015, amid ongoing uncertainty over Greece's debt situation. Key indices in Germany, UK and France were off 0.07% to 0.38%.

Investors continue to monitor developments in Greece's debt talks. The country has to repay 300 million euros ($329 million) to the International Monetary Fund (IMF) by Friday, 5 June 2015. Greece's lenders held an emergency mini-summit yesterday, 1 June 2015 and are preparing a draft text for an agreement, according to reports.

Greece is scheduled to repay a total of euro 1.6 billion ($1.76 billion) to the International Monetary Fund (IMF) over the period between June 5-19.

Asian stocks edged lower today, 2 June 2015, after an encouraging reading on US manufacturing activity in May increased the likelihood that the US Federal Reserve will raise interest rates this year. Key indices in Taiwan, Singapore, Japan, Hong Kong and South Korea were off 0.05% to 1.22%. China's Shanghai Composite was up 1.72%.

US stocks ended with modest gains yesterday, 1 June 2015, recovering part of last week's losses in a session marked by cautious trading as investors reacted to mixed economic data. Among macro data in US, a report from ISM showed the pace of manufacturing growth rose in May. Other data showed construction spending surged in April but consumer spending was unexpectedly flat in April.

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