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BL Research Bureau

The absence of any changes in policy rates in the Reserve Bank of India’s mid-term monetary policy review has seen the markets sharply marking down stocks from interest rate sensitive sectors such as banking, automobiles and real estate on Tuesday’s trading.

The BSE Bankex fell by 3.5 per cent for the day led by index heavyweights such as ICICI Bank and SBI, while the realty index slid by 2.7 per cent, both sharply under-performing the Sensex.

Stocks from these sectors had seen a significant run up in the home stretch to the policy on expectations that the recent cut in the US Fed rates would prompt the RBI too, to follow suit.

A cut in policy rates or the Cash Reserve Ratio could have bolstered the value of bond portfolios for banks and eased margin pressures. A more benign interest rate scenario could also have improved credit offtake.

For realty companies, which have seen a sharp surge in interest incidence in recent quarters, a sustained downtrend in interest rates could reduce costs of funding.

However, despite this, the market reaction to the absence of a rate cut appears slightly overdone. More than the actual cut in policy rates, it would be a sustained downward trend in interest rates and the signals from the policy on this count, that are crucial for rate-sensitive sectors.

A rate cut, even if it did materialise, may only have been at 25 basis points and this may not make a material difference to earnings of the relevant sectors. On this count, the tone of the policy review suggests a softening of RBI’s stance on interest rates and has left the door open for possible downward revisions in policy rates over the next few months.

It also needs to be noted that the RBI in recent months has quite often opted for changes in policy rates between its formal quarterly monetary reviews.

The US FOMC meeting scheduled for today may provide further cues on the possible course of action by the RBI on interest rates in the coming months and may continue to drive market direction.

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