Why stocks tanked after RBI rate cut? It’s something else

At first glance, it appears that the 25 basis points repo rate cut by the Reserve Bank of India (RBI) and its change in policy stance to ‘accommodative’ from ‘neutral’ failed to please the market, with equity barometer Sensex plunging 600 points right after the policy announcement.

Market observers say the move was expected and the market was seeking a positive surprise. The market has extended the fall, as the policy is still ‘reactive’ and not ‘proactive’.

“The market was expecting a positive surprise and the 25bps rate cut and change instance were already factored in,” stated Pankaj Pandey, Head of Research at ICICI Securities.

Bank Nifty fell 1.5 percent following the monetary policy. Most rate-sensitive bank, auto, and realty stocks were trading in the negative zone.

The fact that RBI didn’t have much to say on addressing the liquidity crisis killed market enthusiasm over the rate cut. The fact is, the liquidity crisis remains a pressing reality and RBI needs to do much more to address that, analysts stated.

“While the 25 basis points rate cut was in line with our expectation, but concerns over growth and liquidity challenges continue to linger. The market is not necessarily cheering the rate cut as it had already factored it in and something more was expected,” stated Naveen Kulkarni, Head of Research, Reliance Securities.

Globally, a sharp drop in crude oil prices actually offered positive cues to the Indian market, though Asian markets traded weak amid concerns over the possible impact of the trade tensions on global growth. A Fed signal earlier this week about its readiness to lower interest rates to deal with a potential slowdown kept US markets upbeat overnight.

Now, the progress of the monsoon and the Union Budget would be the two factors the market would be looking at.

Some analysts said there may not be big surprises in the Union Budget. “We don’t expect any surprises from the Budget, because it will be the continuation of the same government,” Pandey said.

Sunil Subramaniam, MD of Sundaram Mutual, said while the broader market consensus was for a 25 basis points rate cut, one section of the market was putting on a bigger hike and they have been disappointed.

Secondly, everybody was aware that the RBI stance would be accommodative. “The market feels what the economy needs is a boost to consumption demand and it could have come from some kind of a mechanism to address the NBFC crisis, which did not come about,” he said.

The Sensex fell 287 points to 39,797 around 12:35 pm. Nifty was 92 points down at 11,930 at the same time.

Rating agencies Crisil, CARE and ICRA downgraded commercial papers (CP) issued by DHFL to ‘default’ or ‘D’ category after the company missed an interest payment on its non-convertible debentures (NCDs). There are rumors in the market that the home financier stares at another default on dues scheduled for Friday.