Sensex tanked over 500 points intraday, extending its losses even after the Reserve Bank of India (RBI) decided to cut the repo rate by 25 bps. The benchmark was dragged by bank and financial services stocks that traded lower.
A downward revision of FY20 GDP growth forecast and no major measure to address liquidity conditions for NBFCs dented sentiment, suggest experts.
"The unanimous decision by the Monetary Policy Committee (MPC) of RBI to cut repo rate by 25 bps and change its stance on liquidity from neutral to accommodative while lowering both the GDP growth forecast and inflation forecast for Q4FY20 is an unambiguous admission that it has failed to anticipate the sharp deceleration in India's aggregate demand and remains firmly behind the curve in providing succour to the beleaguered economy,” Ajay Bodke, CEO PMS at Prabhudas Lilladher told Moneycontrol.
“No specific measure has been announced that would provide immediate relief to the much-troubled NBFC sector. The market is facing a crisis of confidence with respect to the precariously perched NBFC (including HFCs) and fixed-income mutual fund sectors,” he said.
Looking at the market pattern, it was indeed a perfect scenario of a buy-on-rumours-and-sell-on-news scenario that panned out on June 6.
Rate-sensitive stocks that were hitting record highs in the run-up to the MPC meet witnessed a big sell-off in intraday trade. The Nifty Bank cracked more than 700 points breaking below 31,000 largely weighed down by Bank of Baroda, IndusInd Bank, IDFC First, Yes Bank, PNB, Federal Bank and SBI.
“Although a majority of market participants had called for beyond standard cut of 25 bps, the current rate cut came in line with the market expectation,” Dinesh Rohira, CEO and Founder at 5nance.com told Moneycontrol.
Naveen Kulkarni, Head of Research, Reliance Securities told Moneycontrol that while the rate cut of 25 basis points was in line with our expectation, concerns over growth and challenges regarding liquidity continue to linger.
“The market is not necessarily cheering the rate cut as it had already factored the decision and something more was expected,” he said.
RBI's decision to cut rates and change in stance to 'accommodative' from 'neutral' earlier signifies a dovish outlook from the central bank. But, the cut is perhaps not big enough to put Asia’s third largest economy in a recovery mode.
"A 25 bps rate cut falls short of what is required with a delayed and expected insufficient monsoon. This cut is a mild inflation tamer but not the big growth driving rate cut that the economy needs," Ranjan Chakravarty, Product Strategy, MSE, told Moneycontrol.
RBI also lowered the GDP growth rate forecast for FY20 to 7 percent from 7.2 percent that indicates the likelihood of economy facing headwinds led by a slowdown in consumption and private investment, said experts.
"Though the MPC has cut down the GDP growth rate forecast for H1FY20, but the Committee expects growth to be back on track by infusing liquidity through OMOs to the tune of 40k crore announced so-far in FY20. A quick transmission of repo rates by the banks will act as a breather for the Housing finance customers," Foram Parekh, Fundamental Analyst – Equity, Indiabulls Ventures Ltd, told Moneycontrol.
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