Top five takeaways from RBI policy review that can impact stock market

NEW DELHI: The Reserve Bank of India (RBI) on expected lines slashed repo rates by 25 bps and maintained an accommodative stance.

The stock market reacted sharply with the benchmark indices losing close to 1 per cent in a hurry soon after the policy announcement. The SP BSE Sensex fell by over 300 points and Nifty50 plunged towards its next support level at 7,650.

However, the market recouped some of the losses as the market took note of the liquidity provisions provided by RBI, which has proved to be a big hurdle in transmission of rates to end customers.

Here are the key takeaways for the stock market from RBI’s first bimonthly money policy review of the new financial year:

Repo rate cut by 25 bps: A 25 bps repo rate cut to 6.5 per cent from 6.75 earlier is a welcome sign and a big shot in the arm for banks and other rate-sensitive sectors. Repo rate is the rate at which RBI lends money to commercial banks.

A reduced rate will ultimately bring down the cost of borrowing for banks in general, which would help them pass on the benefit to end consumers, which will then kickstart the investment cycle and boost consumption.

Ease in liquidity – booster shot for economy banks: One of the major hurdles faced by the banks was falling liquidity for transmission of rates. In the first policy statement of the financial year 2017, RBI tried to address the issue by reducing the minimum daily maintenance of the cash reserve ratio (CRR) from 95 per cent of the requirement to 90 per cent.

Ease in liquidity conditions will help both PSU as well as private sector banks to focus on lending, which is very important to boost economic growth and kickstart the capex cycle of India Inc, which has remained stagnant because of the higher cost of borrowing.

The move will be a key positive for rate-sensitive sectors such as banks, auto, capital goods, consumer durables as well as realty and infrastructure stocks.

The central bank kept the CRR unchanged at 4 per cent of net demand and time liabilities (NDTL). RBI also narrowed the policy rate corridor from 100 basis points (bps) on either side to 50 bps by reducing the MSF rate by 75 basis points and increasing the reverse repo rate by 25 basis points.

The reverse repo rate under the liquidity adjustment facility (LAF) stands adjusted to 6.0 per cent, and the marginal standing facility (MSF) rate to 7.0 per cent. The Bank Rate, which is aligned to the MSF rate, also stands adjusted to 7.0 per cent, the RBI note said.

RBI: transmission of rates should improve

The most important thing at this juncture is to ensure that current and past policy rate cuts get transmitted to lending rates. Before the policy, the Reserve Bank of India slashed policy rates by 125 bps while banks reduced rates by 50-60 bps. Hence, the full transmission did not happen.

The reduction in small savings rates announced in March 2016, the substantial refinement in the liquidity management framework announced in this policy review and the introduction of marginal cost of funds based lending rate (MCLR) should improve rate transmission and magnify the effects of the current policy rate cut, the RBI note said.

The monetary policy stance will remain accommodative. RBI will continue to watch macroeconomic and financial developments in the months ahead with a view to responding with further policy action as space opens up.

RBI confident of higher GDP growth: The Reserve Bank of India (RBI) remained confident about the recovery in growth in 2016-17, assuming a normal monsoon, the likely boost to consumption demand from the implementation of the 7th Pay Commission recommendations and OROP, and continuing monetary policy accommodation.

After two consecutive years of deficient monsoon, a normal monsoon would work as a favourable supply shock, strengthening rural demand and augmenting the supply of farm products that also influence inflation, RBI said.

Normal or above average monsoon would act as a shot in the arm for two-wheelers as well as auto stocks with a rural focus such as MM, Eicher, Force Motors, Hero MotoCorp, Bajaj Auto etc. among others. The GVA growth projection for 2016-17 is accordingly retained at 7.6 per cent, with risks evenly balanced around it.

Volatility in global financial market key risk: Global financial markets have recouped the losses suffered in the turbulence at the beginning of the year. But, Reserve Bank of India remains cautious of developments happening in other markets and asset classes.

With China reducing reserve requirements, the ECB expanding accommodation and the Fed providing dovish guidance while staying on hold, equity markets rallied. Currencies across EMEs have also appreciated as portfolio flows returned cautiously to local debt and equity markets.

“Commodity prices, including oil, have picked up recently though they still remain soft. However, the uneasy calm that prevails in financial markets could be dispelled easily by a sudden return of risk-off investor sentiment on incoming data, especially pertaining to China or to US inflation,” RBI said in a note.

“RBI highlights heightened financial market volatility as a source of risk. Although India is relatively less exposed than some other emerging markets to global financial market volatility, it is not entirely immune to external developments,” said the RBI note.

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