Market looks unenthused by RBI steps, Sensex sinks 1,400 points from highs: Here's why

NEW DELHI: RBI on Friday announced steps to flood the market with cheaper funds in a bid to mitigate the pain of the Corovirus-induced lockdown of the economy. The measures came hours after Finance Minister Nirmala Sitharaman had unveiled a Rs 1.7 lakh crore relief package for the poor to help them tide over the disruption.

The central bank not only brought down the repo rate to the lowest ever but also allowed EMI and working capital holiday (not waiver), trying to provide some succour to individuals and companies, many of whom are staring at an imminent drought in cash flow or income compression.

While these measures impressed analysts and economists, the equity market gave it a thumbs down and the benchmark Sensex fell over 1,400 points from the day’s high, surprising many.

RBI Governor Shaktikanta Das refrained from making any projections for growth and inflation, saying the performance of the two key parameters would depend upon the intensity, spread and duration of Covid 19.

He admitted that the growth projection of 4.7 per cent for the March quarter and 5 per cent for the whole fiscal was at risk.

Half-an-hour from the RBI announcements, Sensex traded 424 points, or 1.42 per cent, lower at 29,522 after rising 1,000 points earlier in the day. Nifty50 was testing the 8,500 level after briefly topping the 9,000 mark earlier in the day. These indices have been rallying over the past three sessions in anticipation of monetary and fiscal stimulus both at home and in the US.

One analyst, who did not wish to be named, said the announcements made by RBI and FM were extraordinary, and thus the way the market behaved surprised him.

Another analyst, who barred naming, said the economy is facing a major crisis ahead as the current lockdown will pile on a 17-quarter low growth slowdown and is likely to cause some permanent damage.

“The market rallied over the past three days because of short covering. For a country whose GDP was growing at a 17-quarter low, the fresh lockdowns have further lowered growth estimates. Unless India manages to contain the virus either via social distancing or some medicine, there is a big risk of further deterioration in the conditions. Stimulus won’t do much. Singapore is a live example,” he said.

A Reuters poll suggested India, whose GDP has weakened to at least an eight-year low in the ongoing quarter, could slow even more sharply in the next six months due to the global coronavirus pandemic.

Moody’s Investors Service has more than halved India’s 2020 growth forecast to 2.5 per cent within just three week of its previous downgrade to 5.3 per cent.

“The fresh measures will ease the pressure on cash flows in these times, where cash flows (revenues slowing and expenses continuing) are getting impacted significantly, especially for MSME and small business, and individuals are having low income visibility. Overall, these steps are positive for non-banking stocks, though one has to wait and watch how this plays out for the BFSI companies. One can read it as an indirect extension of NPA recognition for stressed assets,” said Vinay Pandit, Head of Institutional Equities at IndiaNivesh.

Deepthi Mary Mathew, Economist at Geojit Financial Services believes that the effectiveness of monetary stimulus announced will be limited, considering the weak sentiment in the economy.

On Thursday, Citigroup Global Markets cut its March 2021 Nifty target to 10,100 from 11,400 as the three-week lockdown amid the Coronavirus scare threatens to hit the economy sharply.

Earnings estimates for the financial year ending March 2021 will see sharp downgrades over the coming weeks, said Citigroup in a note titled ‘Lockdown Blues’ Thursday.

CIMB Securities said earnings outlook of Indian companies may be negative in the short term due to the lockdown, but the sharp decline in the index has driven trailing PE of the Nifty to below – 1 standard deviation of its 15-year mean, which has led to improvement of risk-reward.


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