With a 25 basis point (bps) cut in repo rate and on Wednesday, the Reserve Bank of India (RBI) yet again altered the key rates outside the scheduled policy review meeting in April.
The move saw the benchmark indices scaling new highs with the S&P BSE Sensex gain nearly 400 points to cross 30,000 levels and the CNX Nifty breeze past 9,100 mark in opening deals.
This is the second time since in calendar year 2015 that the central bank has cut rates outside the scheduled Monetary Policy review meeting. Earlier in on 15 January 2015, the RBI Governor, Raghuram Rajan, unexpectedly cut rates by 25 bps that was the change in policy rate stance in 20 months and came in 15 days ahead of a scheduled policy meeting of the central bank on February 3.
The need to act outside the policy, Lakshmi Iyer, chief investment officer (Debt) and head products, Kotak Mutual Fund, says, seems to be guided by the faster pace of disinflation as also the governments intent to adhere to overall fiscal consolidation.
Market reaction
The market reaction to the rate cut, however, seems subdued this time around as the benchmark indices trimmed gained as trade progressed. The interest rate sensitive stocks such as banks, automobiles, infrastructure and realty have come off intra-day high. The CNX PSU Bank index, for instance, is trading nearly 2% higher after rising 4.1% in intra-day deals.
So what's different this time around? Why aren't the markets as enthused as the previous rate cut?
In contrast, the S&P BSE Sensex gained nearly 500 points at the time of the last rate cut in January and settled 2.7% higher, or 728.73 points - the most since Narendra Modi-led Bharatiya Janata Party in the general elections. The benchmark index rallied 847 points in in intra-day deals but settled a tad lower owing to volatility in global markets.
Post the presentation of the Union Budget on 28 February, analysts were expecting the focus to shift to the RBI for policy action.
A recent report by Morgan Stanley, for instance, said: "We believe that the focus will now shift to approval of key policy legislation in the parliament - Amendment to Land acquisition Act, Goods and Services Bill, Coal Mining Bill and Bill for an increased FDI limit in insurance -- and potential monetary policy action."
The road ahead
But was the RBI pushed into doing a rate cut and prop-up sentiment? And, what's next for the markets? Given this backdrop, should you buy into rate sensitive stocks?
Explains Andrew Holland, chief executive officer, Ambit Investment Advisors: "The budget, in my opinion, wasn't fiscally irresponsible. I don't see an untoward reason for the government pushing Raghuram Rajan and we were expecting a rate cut when our markets were around the levels where we currently are."
"Since October 2014, we have been expecting the RBI to cut rates by 50 bps. Did I expect this today - I am not sure. But I think there the RBI Governor has room to do a lot more (rate cuts). I expect 50 bps rate cut by June 2015 - end. The markets, in fact, have moved ahead of everything - be it earnings, economy. So what we will see now is probably markets consolidate until we start to see real growth in the economy starting to pick up and translate into earnings growth for the market. We now need to see reality starting to happen," he adds.
Jayant Manglik, President-retail distribution, Religare Securities also believes that a combination of expectations, a good budget and the repo rate cut has pushed the Sensex over the new milestone of 30,000.
"Ultimately it is just a number. In the first quarter of FY16, it will have to be backed up by corporate earnings growth to sustain. Till then, all-round optimism will keep markets firm. Over the long term, we are confident that the measures taken by the government will translate into industry growth and a Sensex of 40,000 by 2017 is absolutely achievable," he said.
Ajay Bodke, head of investment strategy and advisory, Prabhudas Lilladher expects a series of rate cuts over the next 15 - 18 months and says these rate cuts are just a beginning of a rate cut cycle. "Capital goods, automobiles and banking are the sectors where one can be overweight. Larsen & Toubro (L&T), Cummins India, Ashoka Buildcon, Ashok Leyland, Maruti Suzuki, Bharat Forge, Axis Bank, ICICI Bank and State Bank of India (SBI) are some of the stocks I like," he says.
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