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RBI monetary policy: Why Sensex lost 450 points despite 25 bps repo rate cut

Banking stocks led the losses with the BSE bankex  falling 806 points to 34,675.  Bank Nifty too slipped 690 points to 30,899. Nifty too lost 191 points to 11,830 level. 

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RBI monetary policy: Why Sensex lost 450 points despite 25 bps repo rate cut
Sensex lost 450 points to 39,481 after the RBI announced its monetary policy. The index which stood at 39,931 when the policy was announced at 11: 45 am, fell to 39,481 level.

The 25 basis points repo rate cut by Reserve Bank of India (RBI) failed to enthuse markets in afternoon trade today. Sensex lost 450 points to 39,481 after the RBI announced its monetary policy. The index which stood at 39,931 when the policy was announced at 11: 45 am, fell to 39,481 level intra day.

Banking stocks led the losses with the BSE bankex  falling 806 points to 34,675. Bank Nifty too slipped 690 points to 30,899. Nifty too lost 191 points to 11,830 level intra day. 

Benchmark indices extended losses and ended lower in trade today. While Sensex closed  553 points lower at 39,529, Nifty fell 177 points to 11,843.

Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services said, "RBI has cut interest rates; notably, there were no other liquidity enhancing measures from the RBI. RBI needs to, now ensure that the monetary easing is transmitted to the real economy. "

The fall can be attributed to the absence of any immediate measures to provide relief to the troubled NBFC sector and housing finance companies.

Specifically targeted plans needed to address the crisis among non-banking finance companies which could have led to the recovery were missing in the RBI policy statement.

Home loans to become cheaper as RBI cuts repo rate by 25 basis points

The apex bank cutting the GDP growth forecast to 7 per cent for the current fiscal from 7.2 per cent  earlier also led to negative sentiment on the Dalal Street.

RBI also marginally raised its inflation projection to 3-3.1 per cent for the first half of 2019-20, which is within the comfort range of 2-6 per cent set by the government.

Ajay Bodke, CEO PMS at Prabhudas Lilladher said, "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 for FY 20 and inflation forecast for 4Q FY 20 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.  No specific measure has been announced that would provide immediate relief to the much-troubled NBFC sector. In the presser, the Governor did reiterate multiple times that RBI will do whatever it takes to ensure financial stability of the system. Jittery markets are facing a crisis of confidence with respect to the precariously perched NBFC (including HFCs) & fixed-income mutual fund sectors. It looks highly unlikely that these broad, motherhood statements will assuage market concerns."

There was not any element of surprise in the RBI policy announcement today as 25 bps rate cut was on expected lines. 

Deepak Jasani, head - retail research at HDFC securities  said, "Markets  were  not enthused by these measures (of 25 bps repo rate cut  and  change  in  stance)  as  a  major part of the announcement was on expected lines and the crucial issue of liquidity enhancement to tackle the NBFC  problems  was  not decided right away but referred to a working group who  will  come out with their recommendations after about 6 weeks. Markets continue  to  worry about the fate a lot of stressed NBFCs in the meanwhile and its impact on the general sentiments.

While it is too much to expect to RBI to provide all solutions for the ills affecting  the  NBFC space, some immediate measure (even if not major) with another set of measures due post the report of the working group would have brought  some  succor to stressed NBFCs and made participants more positive about  markets.  Financial  space has been battered a lot as despite yields softening,  as  there  is  little in the policy to overcome recent slippage fears. Liquidity is more important at this stage than the cost of funds.

The  RBI also did not seem worried about the fiscal deficit target for FY20 being breached and would rather wait for the Budget due on July 5."

Naveen Kulkarni, Head of Research at Reliance Securities said, "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 in and something more was expected."

Monetary Policy Meet: RBI cuts repo rate by 25 bps to 5.75%; changes stance to 'accommodative'

Edited by Aseem Thapliyal

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