RBI rate cut: What next for the markets?

Analysts say that though the quantum of rate cut did surprise the markets, the euphoria could be short-lived. The road ahead will be dictated more by global events, they suggest

The markets staged a sharp recovery after the Reserve Bank of India (RBI) cut repo rates by 50 basis points (bps) compared to a consensus estimate of a 25 bps cut.

The S&P BSE Sensex that had plunged over 1%, or 300 points in early moves to 25,287 levels, recovered post the announcement.

Analysts say that though the quantum of rate cut did surprise the markets, the euphoria could be short-lived. Going ahead, the market direction will be dictated more by global events like the US Federal Reserve's plan to hike rates, developments in China and commodity prices.



On the domestic front, they will also react to domestic events such as corporate results and outcome of assembly elections in Bihar in the short term.

 

Explains Vaibhav Sanghavi, managing director, Ambit Investment Advisors: "The policy has been slightly better than expectation in terms of the quantum of rate cut. In the short-term, the markets will try and digest this policy, but what is important is that deflationary pressures globally is giving some amount of comfort on inflation forecast to the RBI. At the same time, proper management by the government in terms of the policies on foodgrain prices in the light of weak monsoon, subsidy management and the overall fiscal management policies are also being viewed as a positive."

"Having said that, the short-term trend will be dominated by what's happening globally, especially in China and the global commodities market. This is the over-riding factor on the domestic positives. We remain bullish on the markets from 18 - 24 month perspective and believe that the Nifty can touch 11,000 mark over this period," he adds.

Deven Choksey, MD and CEO, K R Choksey Shares and Securities, too, feels that the RBI's move has been consistent with their earlier commentary wherein they said that it will rely on the inflation data and cut rates accordingly.

"I believe that they have followed the data print very closely. Since the inflation is now under control, they see room for the economy to kick-start now and hence have lowered the rates by 50 bps. While the overall direction seems positive, the markets are more circumspect about the foreign fund flows. The money that's exiting the market is largely due to the need for global traders / investors to cover for the losses that they have incurred in other global markets. However, this has nothing to do with India's fundamentals," he says.

Investing strategy

So given that the RBI is willing to continue with is accommodative stance and the expected fall in interest rates going ahead, should you buy interest rate sensitive stocks such as autos, real estate and banks?

Ajay Bodke, CEO & chief portfolio manager - PMS at Prabhudas Lilladher suggests it is a good time to buy rate sensitive stocks.

"Inflation forecast has been brought down by the RBI - both for the current calendar year (CY) as well as CY16. This essentially indicates that the disinflationary chill of fall in global commodity prices is here to stay amid a slack in the economic growth. We like banking and auto sectors," he says.

Rate sensitive stock look good from a long-term view point, but one needs to be stock specific here, points out Gaurang Shah, Vice President, Geojit BNP Paribas Financial Services.

"Public sector banks could be immune to asset quality problems given the situation of most state electricity boards. I would prefer private sector banks keeping in mind the earnings as well as valuation correction seen recently. That apart, policy initiatives such as bring in a regulator, working capital facilities which the real estate sector is starved of could also help this sector and provide another trigger besides the cut in rates," he says.