RBI rate cut fails to cheer markets; benchmark indices end in the red

Lack of measures to boost liquidity dents investor sentiment

Equity benchmark indices Sensex and Nifty ended in the red on Friday as the Reserve Bank of India’s (RBI's) rate cut failed to enthuse investors.

 

The Sensex ended the session at 77,860, down 198 points or 0.3 per cent. The Nifty closed at 23,560, down 43 points or 0.2 per cent. Both the Sensex and the Nifty indices logged gains to the tune of 0.46 per cent and 0.33 per cent, respectively, for the week.

 

BSE-listed firms' market capitalisation (mcap) declined by Rs 1 trillion, settling at Rs 423 trillion on Friday.

 

The Monetary Policy Committee, headed by RBI Governor Sanjay Malhotra, slashed the repo rate by 25 basis points to 6.25 per cent. This was the first reduction since May 2020, and the first revision in 30 months.

 

 

Market players said the rate cut was on expected lines and investors were expecting more liquidity-boosting measures.

 

However, investors were disappointed that the RBI did not cut the cash reserve ratio (CRR). The CRR measures the portion of deposits that banks must hold with the central bank as cash. A CRR cut would have allowed banks to issue more loans.

 

Moreover, the easing rates are expected to widen the gap between US and Indian bond yields, potentially accelerating capital outflows from India. Foreign portfolio investors (FPIs) were the net sellers to the tune of Rs 470 crore on Friday, while domestic institutions bought shares worth Rs 454 crore.

 

Indian equities have been declining since October last year due to a slowdown in corporate earnings and heavy selling by foreign portfolio investors, which has caused share prices to plummet. Despite tax relief in the Union Budget and the RBI's rate cut, investors are cautious.

 

"A rate cut to revive the slowing economy is a positive indicator. However, yields increased as investors were disappointed by the absence of anticipated liquidity measures, leading to profit booking in the indices. Additionally, a downward revision in the near-term growth forecast, influenced by global trade policies and inflation concerns, suggests that the central bank will adopt a cautious and gradual approach to future rate adjustments. While the broader market underperformed, the metals sector gained traction amid expectations of increased demand," said Vinod Nair, head of research at Geojit Financial Services.

 

The markets are expected to remain tepid as GDP and earnings growth are likely to remain challenging for a few more quarters, and valuations remain elevated, according to experts.

 

More than half of the Sensex constituents declined. ICICI Bank, which fell 1.2 per cent, was the biggest contributor to the Sensex decline, followed by Reliance Industries, which also fell 1.2 per cent, and ITC, which dropped 2.4 per cent. ITC was the worst performing scrip.

 

"With major events behind us, the focus will return to earnings for further cues. On the benchmark front, Nifty held its crucial short-term support at the 20-day exponential moving average, and sustaining this level will be key for a potential rebound towards 23,900. Otherwise, the bias may turn sideways. Meanwhile, traders should maintain a stock-specific approach with a strong emphasis on risk management," said Ajit Mishra, research head at Religare Broking.

 

Overall, the market breadth was negative, with 1,520 stocks advancing and 2,402 declining on the BSE.