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The 25 basis points (bps) cut in the repo rate on Tuesday did nothing for the financial markets. Ahead of the policy announcement, the 10-year government bonds opened at 7.86 per cent and hit a high of 7.93 per cent. The benchmark Sensex closed 315 points down, as news of the DMK pulling out of the second edition of the United Progressive Alliance came soon after. The much-awaited rate cut has been dismissed by the markets as a non-event, as it will do little to revive the economy, analysts believe.
The rate-sensitive sectors like real estate, automobiles, construction and banking will not be materially impacted by the rate cut. The economy continues to be fragile and the demand situation looks weak. Other than Maruti and Bajaj Auto, all other auto stocks ended in the red, as did banking stocks. The latest cut will not impact any sector because transmission is unlikely to happen in a hurry, given that deposit growth is weak. Also, the demand for credit is unlikely to get a boost, in the first six months.
The market will wait for another rate cut before the interest in rate sensitive stocks revives. Vinay Khattar, head of research at Edelweiss Wealth Advisory & Investment Services, believes high interest rates are not the only reason why investments are stuck. He says: "Projects are not stuck as much for availability of capital as they are for policy reasons. With the DMK pulling out of the government, the reforms process could get restrained." Clearly, the market believes that measures other than monetary easing are more important to revive economic growth. If growth has to return, then the government needs to follow a campaign style approach to revive investments. Morgan Stanley says it will closely track measures the government takes to revive investments. It says: "The government administrative machinery needs to accelerate approvals of investment projects (environmental clearances, etc). In this context, we will closely track the progress made by the newly-appointed Cabinet Committee on Investment to fast-track big projects."
Given that equity markets reward growth to sustain their upward journey, most strategists say six months of reforms have yielded nothing concrete. According to equity analyst Nilesh Jasani at Jefferies, even with the best of reforms and twin deficit improvements, growth prospects would improve only when companies start announcing new projects. Until there is a pick-up in new project announcements, most brokerages remain underweight on rate-sensitives and cyclical stocks. Defensive stocks continue to be in favour.
