Markets banking on sharp rate cuts in 2012-13

Rate-sensitive stocks have run up significantly in the last 10 days; uptick will sustain if the govt does its bit.

With a 50-basis-point cut in the Cash Reserve Ratio (CRR), the Reserve Bank of India (RBI) has officially changed its stance. From the look of it, the markets were expecting this. Since January 12, the BSE Bankex has rallied 26 per cent and the BSE Capital Goods index is up 30 per cent. The CRR cut signals a reversal of the rate cycle. Going forward, it’s apparent the central bank will start easing interest rates, as growth has clearly emerged as a major concern. While the RBI lowered its GDP growth guidance from 7.6 per cent to seven per cent for FY12, it has retained its March inflation estimate at seven per cent.

Clearly, 2012 will bring down the cost of funds for corporate India, which spells good news, especially, for the rate-sensitive sectors. But, is this rally sustainable? Not quite, claim fund managers. While the turning of the rate cycle is a positive, the market cannot move up any further from here, unless there is clarity on some larger macro-challenges that affect GDP growth. Sonam Udasi, head of research at IDBI Capital, believes once the excitement settles, the market will factor in the central bank’s commentary, which indicates the CRR cut is mainly to ease liquidity in the system. The markets will watch what the government does on the fiscal side after the state elections and the Budget. Any further run-up will also imply a bigger fall.

RBI may have changed its stance, but has deliberately left other rates unchanged at this point. Says Rohini Malkani, economist at Citi, “Taking into account the elevated levels of non-food product and the ‘suppressed’ fuel inflation, the RBI has left key policy rates unchanged (repo at 8.5 per cent; reverse repo at 7.5 per cent).” While rate cuts are imminent, a lot depends on what the government does to revive growth.

The market, however, is trying to read between the lines. The aggressive CRR cut has triggered speculation that the rate cuts, once they start in April, could also be aggressive. This presumption is driving the risk appetite in the market. The risk appetite, says Hemang Jani, senior vice-president at Sharekhan, is returning because of the CRR cut. Going forward, mid-caps, infrastructure stocks and some real estate companies may start doing well.