Sensex on Thursday fell over 700 points, while Nifty tumbled close to 21,700 levels with rate-sensitive banks and auto stocks leading the downside after the Reserve Bank of India (RBI) kept interest rate unchanged, as expected, but fell short of keeping a dovish tone.
While maintaining its withdrawal of accommodation stance, RBI Governor Shaktikanta Das also highlighted that the inflation rate was persistently high above the RBI’s comfort range of 4%.
“Although inflation has significantly moderated since its peak in the summer of 2022, markets would be concerned about the probable withdrawal of accommodation. However, this process may only delay the anticipated rate cuts and not stop it. Markets may see some short-term correction but the larger trend on the upside is still intact,” said Sheersham Gupta of Rupeezy.
As expectations were building for dovish guidance on rate cuts and also possibly a change in the monetary policy stance, India’s benchmark 10-year bond yield rose to 7.0730% from 7.0411% before the RBI announcement.
“We believe that since our economic growth is stable and the US Fed too is in no mood to cut rates soon, one can expect RBI to maintain its hawkish stance in H1CY2024,” said Apurva Sheth of SAMCO Securities.
Debt market trackers are expecting 10-year yields to fall to 7% in the coming days as monthly CPI inflation cools down below 5% in the following months.
Inflation next year is expected to be around 4.5% as per RBI’s estimate.
“It could be a little higher as per the Street, but certainly that leaves about a 2% real rate of interest which will be reasonably high. So there is some expectation that as the Fed reveals their card by way of rate cuts somewhere in the middle or end of 2024, the stage will be set for RBI to cut interest rates. And probably that is why RBI’s estimate of growth is a little higher than the Street estimate,” said Nilesh Shah of Kotak Mutual Fund.
On Dalal Street, while the Nifty PSU Bank index was trading about 3% higher led by SBI, Nifty Bank and Nifty Auto fell about 1% each. Kotak Mahindra Bank, ICICI Bank, and Axis Bank led the downside with a dip of 2% each. Among auto stocks, Eicher Motors, Maruti Suzuki, and Sona Comstar fell 2% each.
With RBI’s inflation projection of 4.5% for FY25, any expectations of cuts coming in the current year become unlikely.
Some analysts are interpreting the voting pattern of RBI MPC members as a little dovish with one of the members voting for a 25-basis point rate cut and a change in stance.
“We believe a change in stance will take place soon, given that the government’s fiscal rectitude offers space for the MPC to shift the stance from withdrawal of liquidity to neutral. Given the fact that inflation is projected to average 4.5% in FY25, we see RBI on the cusp of changing its stance in April, followed by a rate cut in June, which will give time to the RBI in terms of synchronizing with the expectations of rate cuts by various Global central banks,” said Amar Ambani of YES Securities.
The rate cut cycle could now start in early H2FY25 after the Lok Sabha elections are over, analysts expect.
“The decision to maintain a steady monetary stance is driven by a couple of strategic considerations. Firstly, with upcoming elections, it’s imperative to avoid inflationary pressures to ensure economic stability. Secondly, in light of the US Federal Reserve’s decision to maintain its current interest rates, any reduction in rates by India could lead to significant depreciation of the Indian Rupee,” said Anirudh Garg, Partner and Fund Manager at Invasset.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
