Why Sensex suffered its biggest fall of this year despite RBI rate cut

The Reserve Bank of India today lowered repo rate for third time in just four months and signaled more easing ahead. The global markets were also supportive. But Indian stocks markets corrected sharply. The Sensex fell 553 points to close to 39,529 – its biggest one-day fall of this year. The Nifty also breached the 11,850 level, ending 1.4% lower at 11,843.

All six members of the monetary policy committee of RBI voted for a 25 basis points cut, and for the stance to be changed to “accommodative”, from “neutral”, signalling more policy easing in the future to support an economy growing at the slowest pace since 2014. RBI chief Shaktikanta Das said the shift in stance indicates rate hikes are “off the table.”

Naveen Kulkarni, head of research of Reliance Securities, said that the market is not necessarily “cheering the rate cut as it was already factored in and something more was expected”. Concerns over growth and challenges regarding liquidity continue to linger, he added.

Nearly twelve months after infrastructure financier IL&FS Group defaulted for the first time, investor confidence has again been shaken this week by signs that the crisis is spreading in the NBFC sector. The crisis has pushed up financing costs and made it harder for NBFCs to access the bond market.

Some market experts say that the Street was expecting some measures from the RBI for the NBFC sector.

Ajay Bodke, CEO for PMS at Prabhudas Lilladher, said that “no specific measure has been announced that would provide immediate relief to the much-troubled NBFC sector.”

“Jittery markets are facing a crisis of confidence with respect to the NBFC and fixed-income mutual fund sectors. Specific and targeted solutions to rescue these besieged sectors alone can stem the panic and stop a further contagion,” Bodke added.

RBI chief Shaktikanta Das, however, in the press conference after the policy announcement reiterated that the central bank will do whatever it takes to ensure financial stability of the system.

DHFL’s short-term credit rating was cut to default by Crisil. Its shares plunged as much as 18% today. Crisil said its ratings downgrade of DHFL was driven by low visibility in raising funds and its belief that liquidity levels would remain subdued. DHFL, which last month also stopped taking new deposits and blocked premature withdrawals, said it found the rating action “extremely surprising”, adding that it was taking steps to ensure there were no defaults on any of its obligations.

“This is a delay and not default,” the company said in a statement late on Wednesday. DHFL said it was taking all necessary steps to ensure that due interest payments are made within the seven-day grace period. Following the rating downgrades, some debt mutual fund schemes with exposure to DHFL have taken a hit as they marked down their investments, leading to a decline in their net asset values this week.

Sanjiv Bhasin, executive vice president of IIFL Securities, termed today’s correction in stock markets as an “over-reaction”. Markets had a “bizarre notion” that RBI would announce measures to bail troubled NBFCs out, he added.

Bhasin is hopeful that the government will come out with strategic announcements on NBFCs and IL&FS.

Khushru Jijina, MD of Piramal Capital and Housing Finance, said that he “anticipates more decisive and pro-active policy measures to address the current liquidity crisis that will enable NBFCs to restore lending activities.”

Jagannadham Thunuguntla, senior VP and head of research (wealth) at Centrum Broking, said: “With RBI’s 25 bps cut, the repo rate in India has reached to 9-year low level of 5.75%. Even though RBI had changed the stance to accommodative, the leg room for further rate cuts is limited.” (With Agency Inputs)

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