Indices post biggest 1-day decline in 2019 despite RBI's dovish stance

The RBI's stance failed to cheer investors as the looming crisis in the non-banking financial companies (NBFC) sector overshadowed the move

The benchmark indices posted their biggest single-day decline of 2019, even as the Reserve Bank of India (RBI) lowered policy rates by 25 basis points (bps) — a move that was widely expected. 

The central bank cut rates for a third time this year, and kept the option open for further easing to boost growth. 

The RBI’s dovish stance failed to cheer investors as the looming crisis in the non-banking financial companies (NBFC) sector overshadowed the move. 

Most investors were hoping that the central bank would announce some measures to help alleviate the crisis in the NBFC sector.

The Sensex ended at 39,529.72, down 554 points or 1.38 per cent, on Thursday, while the Nifty lost 178 points or 1.48 per cent to close at 11,843.75. This was the biggest single-day fall for both indices since December 21, 2018.

All the 19 sectoral indices compiled by the BSE ended the session with losses. The BSE Bankex and BSE Finance indices declined over 2 per cent each. 

Most NBFCs dropped over 7 per cent, while the Dewan Housing Finance (DHFL) stock fell 16 per cent after rating agencies lowered its rating to ‘default’.  

“With the recent news around DHFL and the possible contagion effect, several financials corrected heavily. However, I believe that the market will soon take cognizance of the change in policy stance to accommodative. This dovish policy opens the doors to another rate cut in 2019,” said Amar Ambani, president and research head, YES Securities. 

The benchmark indices had closed at record highs on Monday, anticipating a rate cut. With the latest 25 bps cut, the repo rate has reached a nine-year low. 

“Even though the RBI changed the stance to accommodative, the leg room for further rate cuts is limited. Further, the repayment delay by DHFL is way too big a strain for the market, considering the IL&FS default itself remained unaddressed for 10 months. Markets have turned risk-averse due to worries associated with contagion risk,” said Jagannadham Thunuguntla, head of research at Centrum Wealth.

On Thursday, both domestic as well as foreign institutional investors (FIIs) were net sellers. FIIs sold shares worth Rs 416 crore, while their domestic counterparts took Rs 355 crore off the table.

Banking stocks were among the biggest losers among Sensex components. IndusInd Bank and YES Bank fell by more than 6 per cent each, followed by State Bank of India, which shed above 4 per cent.

Experts said that a big upmove in the markets would depend on policy action by the government. 

“What the finance minister speaks before the Budget will be keenly watched by the market. That will give us some clue on whether the budget will have policies to revive growth. Further, whether the government brings big bang announcements is what investors are keen to know,” said Andrew Holland, Avendus Capital Alternate Strategies.