Benchmarks fall on inflation concerns; bank, consumer stocks underperform

Benchmark indices fell half a per cent on Thursday, led by banking and consumer stocks, after the Reserve Bank of India (RBI) took measures to curb excess liquidity amid inflation concerns.

The Sensex ended the session at 65,688, with a decline of 307 points, or 0.5 per cent, while the Nifty50 ended the day at 19,543 or 89 points, also with a drop of 0.5 per cent. The Bank Nifty fell 0.76 per cent and the Nifty FMCG fell nearly a per cent.

The RBI held the key lending rate steady but moved to reduce the amount of cash in the system, directing banks to maintain an incremental cash reserve ratio (CRR). From August 12, banks will have to maintain an incremental cash reserve ratio of 10 per cent.

Analysts termed the RBI's move a sign of higher diligence towards rising prices and said banks would end up parking more funds with the RBI for which they won't be earning interest.

Investors were also concerned with the RBI governor Shaktikanta Das’ statement that a substantial increase in headline inflation would occur soon. RBI also raised its retail inflation forecast for the 2023-24 financial year (FY24) to 5.4 per cent from 5.2 per cent earlier.

In his statement after the monetary policy announcement, the RBI governor said that uncertainties remain on the domestic food price outlook due to sudden weather events. Das added that crude oil prices had increased in recent times, and demand-supply uncertainties cloud its outlook.

"The 10 per cent incremental CRR and revising inflation estimates were unexpected. Lendable resources will come down after incremental CRR kicks in. It affects HDFC Bank more because its CRR requirement is already high post the merger with HDFC,” said UR Bhat, co-founder of Alphaniti Fintech.

Shares of HDFC Bank declined 0.85 per cent and made an 87-point negative contribution to the Sensex. Shares of ITC fell 1.6 per cent and was the second-biggest contributor to the 30-share index’s decline.

“The outcome on liquidity came in as somewhat more hawkish than expected. Uneven distribution of monsoon and adverse weather, given El Niño conditions, continue to pose upside risks to food inflation,” said a note by Goldman Sachs.

"FMCG companies will not be in a position to pass on the additional cost incurred due to food inflation immediately. And their margins will be dented in the near term,” said Bhat.

On the day, market breadth was unfavourable with 1,994 stocks declining and 1,613 gaining despite positive flows from institutional investors. Foreign portfolio investors and domestic institutional investors bought shares worth Rs 331 crore and Rs 703 crore, respectively.

Going forward, volatility will continue, and investors will be watching the remainder of the results and new readings of high-frequency economic indicators from India and abroad. The India Vix index rose 2.33 per cent to 11.4.

“The Nifty has been struggling to hold short-term moving averages mainly due to the underperformance from the banking pack. Besides, it is also facing the hurdle of a declining trendline around 19,650. Amid all, global cues are still neutral, and any deterioration on that front may further add to the pressure. We thus recommend limiting positions and waiting for clarity over the next directional move,” said Ajit Mishra, senior vice president, technical research, Religare Broking.

Nifty to hit 21,400 by Mar 2024: ICICIdirect

The Nifty 50 is undergoing a “healthy consolidation” after a sharp rally of 16 per cent from March lows and the index is headed towards 21,400 by March 2024 with an intermediate target of 20,700 by Diwali, said ICICIdirect in a note. “The ratio of new 52-week highs and 52-week lows has given a breakout above 30 indicating a 10 per cent rally in Nifty 500 index over the coming six months,” it further said, recommending its clients to buy-the-dips. The brokerage said the Dollar index is in a weak trend and charts suggest further breakdown, which would act as a tailwind for flows to emerging markets, including India. BS REPORTER