Stock market indices tumbled on Tuesday following the Reserve Bank of India (RBI) announcing a surprise upward revision in its projection of inflation to about six per cent by January 2015, which reduced the scope for further rate reduction this year.
The BSE 30-share Sensex closed at 27188.38 with a loss of 660.61 points or 2.37 per cent. However, the rupee lost 12 paise at the close at 63.82 a dollar compared to its previous close of 63.70 on the last trading day.
“The RBI has delivered 25 basis points rate cut as expected by most of the market, we still feel that the commentary and forward guidance might not be to the liking of the market,” said Ritesh Jain, Chief Investment Officer, Tata Asset Management.
Among the broader indices, BSE 100 lost 2.24 per cent and BSE 200 was down by 2.23 per cent. BSE’s mid-cap and small-cap stocks also lost 2.22 per cent and 2.06 per cent respectively.
On the National Stock Exchange (NSE), the 50-share Nifty lost 196.95 points or 2.34 per cent to close at 8236.45.
Though the policy does not state anything to be overly worried about, the fact that the word ‘accommodative stance’ has been dropped and policy has emphasised on risks to inflation, would lead to a more balanced view on policy.
“We believe that going ahead, RBI would act to cut rates as and when dis-inflationary trajectory provides space to do so,” said Mr. Jain.
Over the medium term, Mr. Jain expects inflation would continue to come down, driven by continued thrust on policy reforms as well as active measures by government to control food supplies to counter potential weak monsoon.
“We expect markets to remain range bound with negative bias in near term, but would gradually move towards positive side as risks unfold in second half of the current financial year.” The 25 basis points easing was broadly in line with the consensus expectations which had already been priced into the market.
However, the negative surprise for the market was the scaling up of inflation projection for January 2016 to 6 per cent and downward revision for real GVA growth projection for the current fiscal to 7.6 per cent from 7.8 per cent earlier, said Dhananjay Sinha, Head of Research, Economist & Strategist, Emkay Global Financial Services Ltd.
“Clearly”, said Mr. Sinha, “This has dissipated the hopes for sustained softening in the interest rate cycle.”
