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On Tuesday, markets fell the most this month, after the Dravida Munnetra Kazhagam (DMK), a crucial ally of the ruling United Progressive Alliance government, withdrew support, sparking concern on whether the government would be able to push through pro-business policies.
The Reserve Bank of India’s (RBI) cautious monetary policy outlook also contributed to concerns on Dalal Street.
Benchmark indices, which were trading higher in early trade, declined soon after the central bank expectedly cut the repo rate by 25 basis points. The slide was accentuated when the DMK announced withdrawal of support to the ruling coalition. Analysts said while investors weren’t concerned about the government’s stability, owing to outside support from the Samajwadi Party and the Bahujan Samaj Party, there was scepticism on its ability to implement tough measures such as subsidy reductions.
On Tuesday, the Sensex dropped 285.10 points, or 1.48 per cent, to close at 19,008.10; the Nifty fell 89.30 points, or 1.53 per cent, to close at 5,745.95. Selling in telecom stocks, led by Bharti Airtel, also weighed on the sentiment.
“In the near term, we expect the government to shift its focus to managing coalition partners,” said Sonal Verma and Aman Mohunta, economists at Nomura. “Some reform legislation would be passed. But with the general elections due by May 2014, we expect political uncertainty to resurface in the second half of FY14. We expect politics to trump economics,” they said in a client note.
On Tuesday, foreign institutional investors, which have pumped in about Rs 50,000 crore into Indian equities so far this year, net-bought shares worth Rs 62 crore.
Analysts said investors were worried over RBI’s statement that there was only limited room for monetary policy easing. Investors are concerned about the effect of high interest rates on companies’ earnings and investments in the economy. “The market will likely be range-bound, as it grapples with macroeconomic challenges, weak earnings momentum and fair valuations,” said Sanjeev Prasad, senior executive director and co-head, Kotak Institutional Equities.
Some analysts, however, feel RBI’s statement was aimed at tempering expectations on the extent of future rate cuts. “We see today’s guidance as a hedge against expectations of further cuts. Ultimately, the need to support growth will prevail and, therefore, further easing lies ahead,” said Abhay Laijawal, managing director & head of research, Deutsche Equities India. “We see the path of fiscal consolidation and inflation in the coming months conducive towards rate cuts in early May and mid-June,” he said.
