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Rate cut not deep enough to scare bears off Dalal Street

The market had expected the central bank to cut interest rates by at least 35 basis points.

ET Bureau|
Oct 05, 2019, 08.38 AM IST
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While the extent of the rate cut disappointed the market, the RBI is open to further rate cuts.
MUMBAI: The stock market fell about 1.2% on Friday, extending losses to the fifth straight day, after the rate cut by the Reserve Bank of India (RBI) fell short of investor expectations. Continued selling by foreign funds in October so far has raised concerns that the optimism around corporate tax cuts last month could be waning, adding to uncertainty about the health of the country’s financial sector.

The Sensex declined 1.14%, or 433.56 points, to close at 37,673.31, while the Nifty fell 1.23%, or 139.25 points, to 11,174.75. For the week, both indices plunged around 3% each, posting their biggest weekly decline since May 12. Non-state lenders — Kotak Mahindra, ICICI and HDFC Bank — led the sell-off midway through the trading session after the RBI, in its policy meeting, cut the repo rate by 25 basis points and slashed its FY20 gross domestic product (GDP) forecast to 6.1% from 6.9%.

FPIs Extend Selling Spree

The market had expected the central bank to cut interest rates by at least 35 basis points. A basis point is 0.01percentage point.


“Given the continued slowdown in economic parameters, low inflation and 35 basis point rate cut earlier (in the August policy), investors were expecting more than 25 bps rate cut again this time,” said Rajat Rajgarhia, managing director, institutional equities, Motilal Oswal Financial Services. “Continued worries over asset quality and FII (foreign institutional investor) outflows have weakened the market sentiment.”

The BSE Mid-Cap index fell 0.94% while the BSE Small-Cap index declined 0.79%.

Foreign portfolio investors (FPIs) sold shares worth a net Rs 682.93 crore on Friday, extending their total sales tally to Rs 3,330 crore in October so far. In September, they were buyers to the tune of Rs 6,500 crore thanks to the corporate tax rate cuts.

The market euphoria triggered by the tax cuts on September 20 appears to have fizzled out with worries about the asset quality of select banks and nonbanking finance companies (NBFCs) as well as the economic slowdown taking precedence. Some market watchers have raised concerns over the impact of the move on the country’s fiscal deficit.

“After a kneejerk positive reaction to corporate tax cuts late last month, investors in stocks seem to have retrained their focus back on weak growth prospects ahead, both globally and domestically,” said Prakash Sakpal, Asia economist of ING. “We don’t see RBI easing as a positive here and indeed, this was evident today (in the stock market reaction).”

After the Sensex rallied 3,000 points in two days after the tax cut announcement, the benchmark index has corrected nearly 983 points since September 23.

Purchases by domestic institutions have averted a sharper slide in the market. After buying shares worth Rs 11,079 crore in September, they have pumped Rs 1,930 crore into stocks in October so far.

Many investors have felt that the central bank needs to step up monetary easing to supplement the government’s efforts to revive the economy. While the extent of the rate cut on Friday disappointed the markets, optimists are relieved that the guidance suggests the RBI is open to further rate cuts. Most economists are betting on a rate cut of another 25 basis points in the RBI’s policy meeting in December.

“Lower rates are a necessary condition for the economy to pick up, even if no longer sufficient,” said a Credit Suisse note after the RBI’s policy action.

On Friday, Zee Entertainment was the top loser on the Nifty, with the stock sliding 6.4% to Rs 235.40 after Morgan Stanley cut its target price to Rs 248 from Rs 370. The brokerage said it expects the uncertainty to continue as the promoter debt issue lingers.

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