Lukewarm welcome of RBI Rate Cut by Market

Yesterday, the Monetary Policy Committee did the unexpected

but hoped. They unanimously decided to cut the rates by 25
bps, thus bringing the key policy interest rates to its lowest
level since 2011. The rate cut had the main objective of
bringing the CPI Inflation at 5% by the fourth quarter of 201617. Retail inflation stands at 5.05%, the lowest in five months.
Although the Governor, Urjit Patel, did not throw a hint on the
future stance on rate cut by committee, however, his
colleagues and the RBI ED hinted on the scope of easing the
interest rates further in future.
With this rate cut, the policy rates have been reduced by 175 bps since January 2015 by
RBI. However, the Banks have failed to pass on the full quantum of the reductions to
lending rates so far.

Market Reaction:
Market gave a lukewarm welcome to the RBIs rate cut. The shares of interest-rate
sensitive stocks from Banking, Automobile and real estate sectors registered moderate
gains.
The BSE Realty Index rose 0.96% while Nifty Realty closed 0.38% higher; BSE Bankex
gained 0.42% with Bank Nifty closing 0.43% higher than the previous close. BSE Auto
index edged 0.05% higher with Nifty Auto made the close after rising 0.14%.
The big lenders like SBI and PNB gained 1.6%, Federal Bank gained 1.07%, Yes Bank
advanced 0.97% and ICICI Bank rose 0.84%. On the other hand IndusInd Bank and Axis
Bank ended up 0.75% lower.

ICICI Bank reduced its MCLR by 5 basis points across various loan tenures. Post the cut,
the one-month MCLR is 8.85 per cent, while the one-year MCLR is 9.05 per cent. Other
banks hinted that they could cut lending rates if liquidity stays comfortable.
NBFC hiked by 7.33% and Oberoi Realty went up by 3.84%. Tata Motors became the only
Auto stock with a healthy gain of 1.6% while Bajaj Auto and Hero MotoCorp gained
0.63%. On the other hand Maruti Suzuki slipped by 0.03%.

8.00%
7.00%
6.00%
5.00%
4.00%
3.00%

% gain/loss

2.00%
1.00%
0.00%
-1.00%
-2.00%

The Public Sector Banks reacted well to the rate cuts and the proposal to ease stressed
assets norms. The rally is expected to extend as valuations are not expensive and the worst
appears to be behind on the credit cost front. On the day of credit policy declaration, Nifty
PSU Bank Index went up by 0.43% and Nifty hiked by 0.4%. Among the PSUs Union

Bank of India rose the highest, advancing 6.8% while others like Canara Bank, SBI, PNB
increased between 2-4%.

Reasons for rate cut:

Inflation: The month of August have witnessed the negative momentum of food inflation,
pulling down the CPI to the intra-year low. This gave RBI and MPC some comfort and
room for slashing the rates.
Liquidity: The Liquidity infusion of Rs. 20,000 crores has helped the liquidity conditions
to remain comfortable in the third quarter of this calendar year. The Weighted Average
Call Money Rate or WACR traded with a soft bias, remaining tightly aligned with the
policy repo rate. Interest rates on Commercial papers and Certificate of Deposits also
eased enabling the smooth transmission of policy action through different market
segments.
The rural Push: The outlook for agriculture and allied activities has brightened
considerably. Kharif has surpassed last years acreage. Barring cotton, sugarcane and jute
and Mesta, the first advance estimates of kharif food grains production for 2016-17 have
been at a record level, and higher than the target set for the year.
Manufacturing: Not much activity is detectable in the industrial sector which went
through a contraction in the early financial year, after a sequential deceleration in gross
value added in Q1. Some space of growth was visible in the steel sector as production rose
to a 37-month high and cement production maintained impetus. Output of core industries
was weighed down by a decline in the production of coal, crude oil and natural gas and
deceleration in refinery products and electricity generation. In the services sector, the
hastening in the pace of activity in Q1 appears to have been sustained.
Positive Outlook: The sturdy public investment in roads, railways and inland waterways,
the new efforts to clear cash flows in large projects under arbitration, and the increase in
spending from the 7th Pay Commissions award, should improve the industrial outlook.
The drive of growth is estimated to quicken with a normal monsoon raising agricultural

growth and rural demand, as well as by the motivation to the urban consumption spending
from the pay commissions award.

Concluding:
Corporate India couldnt get a better Diwali Gift from the new Governor. The rate cut
could save companies around Rs. 6,300 crore in the interest outgo yearly. After the rate
cut, the market has set its eye on the GST and 7 th Pay Commission. And now the market is
looking for another rate cut in the December meeting.

Disclaimer
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research team. Users are advised to use the data for the purpose of information and rely on their own judgment while making
investment decision.
Dynamic Equities Pvt. Ltd - SEBI Investment Advisory Reg. No.: INA300002022

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Article Written by
Tanaya Nath