The monetary policy review by the Reserve Bank of India (RBI) on Tuesday failed to enthuse the stock market participants as the central bank kept the rates unchanged.
However, in the bond market, yield on the benchmark 10-year government securities (G-Sec) closed below 8 per cent, a level last seen in July 2013. On Tuesday, yield on this paper softened by about 10 basis points (or the price went up by 60 paise) to close at 7.96 per cent (price: Rs. 102.85).
Meanwhile the Rupee gained against the U.S. dollar on expectation that the central bank is likely to cut rates in early 2015. The rupee closed on Tuesday at 61.88 per U.S. dollar compared to its Monday’s close of 62.02. It hit an intra-day low of 62.25 on Monday.
The Bombay Stock Exchange (BSE) 30-share Sensitive Index (Sensex) closed at 28,444.01 with a loss of 115.61 points or 0.40 per cent.
Except mid-cap stocks and small cap stocks which gained 0.91 per cent and 0.55 per cent respectively, all other broader indices ended in the red.
On the National Stock Exchange (NSE) a broader 50-share Nifty lost 31.20 points or 0.36 per cent, to close at 8524.70.
“A large section of the market had factored in a status quo during this policy meet and expected rates to be cut from early 2015. To that extent there should be no impact on the equity market on account of the RBI policy,” said Nirmal Jain, Chairman, IIFL.
“A rate reduction may happen in February. The inflation numbers in the coming months will be closely watched,” Mr. Jain added.
“The RBI monetary policy was along expected lines, even though some sections of the market had started building in the probability of a rate cut in this review,” said Santosh Kamath, Managing Director - Local Asset Management, Fixed Income, Franklin Templeton Investments, India.
The central bank’s guidance points to easing of monetary policy stance in early 2015, provided inflation remains subdued and fiscal conditions remain stable, with the possibility of action being taken outside
With that, said Mr. Kamath, the three key risks for fixed income funds (interest rate risk, credit risk and liquidity risk) appear to have reduced now in India. The interest rate risk has reduced considerably, especially with the sharp fall in crude oil prices. This will not only help to keep inflation in check, but will also help to reduce the twin deficits, and augurs well for the economy too.
“The policy has been broadly in line with our expectations. It is a pragmatic policy with a realistic assessment of the concerns relating to inflation and growth. The policy is relatively more dovish than earlier though not overly benign,” said Killol Pandya, Senior Fund Manager - Debt of LIC Nomura Mutual Fund.
“Debt market participants may continue to expect bond markets to remain in the positive zone and I continue to expect RBI to initiate rate cuts early in the next calendar year,” Mr. Pandya added.
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