The benchmark indices fell on Friday, despite a 25-basis-point (bp) rate cut by the Reserve Bank of India (RBI), as market sentiment was dented after the central bank lowered its economic growth forecast.
The RBI reduced its gross domestic product (GDP) estimates for the current financial year from 6.9 per cent to 6.1 per cent. The Sensex ended Friday’s session 434 points, or 1.14 per cent, lower. The Nifty dropped 139 points, or 1.23 per cent, to close at 11,175. Both indices have declined about 3 per cent this week, the biggest weekly fall since May 10, amid turmoil in the financial sector.
The Sensex rose as much as 300 points before giving up gains to end the session in the red, after the policy announcement.
Banking stocks fell the most in the Sensex pack, with Kotak Mahindra Bank falling 3.32 per cent, ICICI Bank 3.17 per cent, and HDFC 2.80 per cent.
The 10-year bond yield rose 7 bps to 6.68 per cent on Friday, against 6.61 per cent on Thursday.
“The 25-bps cut was in line with market expectations. Given you have a big reduction in the GDP projections, the RBI could have done more. Markets are yet to work out whether the tax cut is enough to make the economy going. Globally, talks of recession and trade discussions will determine where the markets are headed,” said Andrew Holland, CEO of Avendus Capital Public Markets Alternate Strategies.
The RBI’s revised estimates come at a time when the GDP growth has fallen to a six-year low of 5 per cent, in the June quarter, due to a slowdown in consumption. The slowing economic growth has prompted the government to announce a slew of measures, including a cut in the corporation tax rates.
“With high-frequency data remaining weak, it’s fair to expect further markdowns on growth estimates,” said Rajeev Radhakrishnan, head (fixed income) and fund manager at SBI Mutual Fund.
Market players said that given the large revision in growth outlook, the 25-bp reduction seems inadequate.
“The cumulative transmission of the 110-bp rate cuts, prior to today’s action, has been only around 29 bps on fresh bank loan rates. Overall, considering the stated policy priority to revive growth, policy actions need to address the issue of transmission both in the bond and loan markets,” said Radhakrishnan.
Vinod Nair, head (research) at Geojit Financial Services, said that though the government’s measures do have the potential to enhance consumption and spur investment, the lag in transmission of cumulative rate cuts is adding a layer of complexity in the recovery. Market players also expressed concerns that there will now be limited elbow room for the RBI to take monetary action.
The markets have been on a downward trajectory throughout the week, as fresh crisis in the financial sector has diminished the positive sentiment brought by the corporation tax cuts. Investors have been pulling out money on worries that bad loans might spike following the turmoil in key NBFCs and real estate entities.
Foreign portfolio investors sold shares worth Rs 683 crore, while domestic investors provided buying support to the tune of Rs 606 crore. Barring two, all 19 sectoral indices of the BSE ended the session with losses.
The decline was led by banking stocks that fell by 2.45 per cent, while auto and realty stocks fell 1.10 per cent and 1.15 per cent, respectively.
Stocks have been volatile since the start of the year, due to issues like rising instances of corporate default and sluggish earnings growth. Globally, the US-China trade tensions, coupled with fears of recession, have added to investors’ woes.