Why Sensex Plunged 550 Points Post RBI Policy

The BSE Sensex fell over 550 points, while the broader Nifty slumped 170 points near 8,250 post Reserve Bank’s policy announcement on Tuesday. The sharp selloff in stock markets came even though the RBI cut its repo lending rate by 25 basis points to 7.25 per cent.

Here are the reasons for the selloff in stock markets today:

1) 25-basis point rate cut discounted: Traders said a 25-basis point cut was factored in by the markets. A sharper 50-basis point cut in repo lending rate could have lifted market sentiments. “RBI policy 25 bps does not move the needle….markets will head lower from here,” tweeted Andrew Holland, CEO of Ambit Capital.



 

#RBIpolicy 25bps does not move the needle….markets will head lower from here

— Andrew Holland (@Hollaand) June 2, 2015

2) Cautious commentary from RBI: Governor Raghuram Rajan’s outlook about Indian economy is being interpreted as cautious by economists. What’s more the RBI lowered its FY16 GDP growth estimate from 7.8 per cent to 7.6 per cent with a downward bias; it also revised up its inflation projection to 6 per cent by January 2016 due to monsoon risks and higher services tax rate. Dr Rajan also said weak results from corporates suggested “final demand is yet to pick up strongly”.

3) Question mark over further rate cuts: This year the RBI has cut repo rate by 75 basis points in three installments. At the start of the year, there was expectation that the central bank would cut rates by 100 basis points or even more thorough the fiscal year that ends in March 2016. Dr Rajan today said that the RBI has front-loaded interest cuts, which means that the central bank may be on an extended pause. According to Nomura, the next rate cut is unlikely to come until end-2016.

R Sivakumar, head of fixed income at Axis Asset Management tweeted, “RBI may be on extended pause now… markets not happy.”

RBI may be on extended pause now.. markets not happy

— Sivakumar (@eyeofsiva) June 2, 2015

4) Pass-through of rates unlikely: The RBI said banks should pass-through the sequence of rate cuts into lending rates, but analysts say rates are unlikely to come down because the RBI did not take steps to free up liquidity.



 

The meaningless Repo Rate cut. Banks will not cut rates Without boosting liquidity rates cannot fall RBI the reluctant easer Onus on Govt

— sandip sabharwal (@sandipsabharwal) June 2, 2015

5) Possibility of rate hikes: Yes, that’s what economists such as Moses Harding expect from the RBI at the end of the year if inflation climbs.