Rate-sensitive stocks feel the chill after RBI rate pause

Marco Green
December 7, 2017

The Monetary Policy Committee (MPC) maintained its growth forecast for the year 6.7% and nudged upwards its inflation forecasts for Q3 and Q4 FY18 to a range of 4.3% to 4.7% from its October forecast range of 4.2% to 4.6%.

The repurchase rate will stay at 6 per cent, according to 42 of 48 economists in a Bloomberg survey, with the rest seeing a cut to 5.75 per cent.

The RBI as well as private economists predict inflation will quicken to about 4.5 per cent by March 31, and swap traders are pricing in the possibility of an increase in the key policy rate next year even as most economists see no change. Third, RBI is concerned that the recent rise in global crude oil prices may sustain, especially on account of the OPEC's decision to maintain production cuts through next year. First, the moderation in core inflation (inflation excluding food and fuel) observed in Q1 2017-18 has reversed and there is a risk that this upward trajectory may continue in the near-term.

"Given that interest rates are unlikely to reduce at least in the near to medium term, rate sensitive stocks slid due to rising oil price and concern over fiscal slippage", said Vinod Nair, Head of Research, Geojit Financial Services.

"Recapitalization of public sector banks may help improve credit flows further", said the Reserve Bank of India in official statement after the meeting. The capital infused has helped in raising the market by setting up new projects.

The 30-share index declined by 205.26 points, or 0.63 percent, to 32,597.18 after hitting a low of 32,565.16 soon after the central bank announced its policy decision. The central bank's tendency to overestimate inflation has prevented it from cutting interest rates further and cost the economy, said Ashima Goyal, a member of Modi's Economic Advisory Council.

The Reserve Bank's two-day monetary policy review kicked off on Tuesday.

"The policy guidance is in line with market expectations reflected in spike in 10-year bond yields beyond 7 percent mark".

The positive end in bond markets comes after a recent sell-off sent the 10-year bond yield up by more than 60 bps since the RBI last cut the repo rate by 25 bps in early August.

"It is also to be noted that the future policy actions will largely depend on data facts".

Other reports by Click Lancashire

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