Benchmark continue to trade in red ; Sensex below 18,500

Equity markets are showing no signs of relief with major indices still reeling under pressure after witnessing a cut of more than 2% in last session and with Benchmark indices touching more than 5 week low. It appears investors are reluctant to take risk even at these levels after a steeper than expected rate hike by the Reserve Bank of India yesterday coupled with sustained selling drive by foreign institutional investors over the past few days. The US markets closed flat overnight with a negative bias and all the Asian peers were trading in the negative terrain at this point of time, further dampening investor's sentiments in the local bourses. On the BSE sectoral front, Oil & Gas, Capital Goods, Bankex and Consumer Durables are putting some resistance. However, stocks from Auto, IT, Teck, Health Care, Metal, Realty, Power and FMCG were the one which continue to drag the markets down. 

The Reserve Bank of India (RBI) on Tuesday hiked its key short term lending rate repo by 50 basis points (bps) while announcing the monetary policy statement for FY12. While the central bank had already hiked repo rate by cumulative 200 bps before this in the current rate hike cycle, the transmission of the latest hike is expected to be faster than what has been the case in most of the last fiscal. Even as the liquidity remained in deficit mode for most of the second half last financial year, passing down of the RBI's rate hikes through banks was not happening at a rapid pace. Technically called the transmission of monetary policy, the process was slower because banks in most cases choose to pass on very little of their increase in costs to consumers. This was because margins were healthy and banks wanted to drive volumes and gain market share.

Both the benchmark indices, i.e. Sensex on Bombay Stock Exchange (BSE) and Nifty--on NSE were trading below their physiological level of 18500 and 5550 respectively. Meanwhile, broader indices continued trading in red and were down by 0.52 (BSE Midcap Index) and 0.41 %( BSE Smallcap Index) respectively. The overall market breadth on BSE was in the favour of declines with advance-decline in the ratio of 885:1395, while 71 shares remained unchanged.

The BSE Sensex is currently trading at 18,464.29, down by 70.40 points or 0.38%. The index has touched a high and low of 18,558.33 and 18,339.53 respectively. There were 10 stocks advancing against 20 declines on the index.

The top gaining sectoral indices on the BSE were, Oil & Gas up 0.66%, Capital Goods up 0.34%, Bankex up 0.29% and Consumer Durables up 0.11%.

While, Auto down 1.87%, IT down 1.46%, Teck down 1.41%, Health Care down 1.21%, Metal down 1.01%, Realty 0.49%, PSU down 0.13%, Power down 0.10% and FMCG down 0.07% were the losers on the index.

The top gainers on the Sensex were ONGC up by 1.86%, HDFC Bank up 1.29%, SBI up 1.23%, HUL up by 1.07% and L&T up by 0.75%.

On the flip side, Bajaj Auto down by 4.28%, Hero Honda down by 2.62%, Maruti down by 1.85%, Bharti Airtel down by 1.83% and Jindal Steel down by 1.70% were the top losers on the index.

Meanwhile, the situation is going to be quite different now for a number of reasons. First, since the central bank has made the repo rate as the only indicative rate, it is quite likely, given the high inflation, the central bank will keep the liquidity in the deficit mode. Repo can be an effective indicative variable of monetary policy only when banks borrow from RBI's short term liquidity adjustment faculty (LAF) regularly, thereby necessitating some deficit in the system.

Secondly, the RBI has also introduced a Marginal Standing Facility (MSF) from which banks can borrow overnight up to 1% of their respective net time and demand liabilities (NDTL). The rate of interest on amount accessed from this facility will be 100 bps above the repo rate. The fact that RBI has chosen to introduce this facility also indicates that it intends to keep liquidity in the deficit mode. To the extent banks would be borrowing from this window, they will pay higher cost as rate here would be 100 bps above repo rate.

These two steps while in the long term will ensure more stability in the overnight rates, the short term implication is that repo will become the base rate for overnight money (assuming liquidity remains in deficit) but rates may stay be more close to the MSF rate or above that depending on the deficit in system. This clearly means significant upside in overnight rates from where these have been observed over last few weeks.

Another factor that will increase costs is hike in saving deposit rate. The reason behind the increase is that until saving deposit rates too move along with other deposit and lending rates, which have been moving upwards given the monetary tightening cycle, transmission of monetary policy slows down. While the central bank is also simultaneously deliberating deregulating the saving deposit rate, even the 50 bps increase already implemented will have 10-15 bps upside in financing cost for all the banks depending on the share of saving deposits in their total deposits.

Lastly, one should remember that a large chunk of the 200 bps hike seen in the rates so far has not been passed on by banks to borrowers. Now however the cumulative impact of 250 bps hike in repo rate and rise in saving deposits will be too much for the banks to absorb. Overall increase in costs has been at least 50-100 bps following the latest monetary policy action and banks are very much likely to pass significant chunk of this to consumers. As such, over the next few fortnights, lending rates are likely to go up anywhere between say 50-100 bps.

The S&P CNX Nifty is currently trading at 5,535.40, down by 29.85 points or 0.54%. The index has touched a high and low of 5,567.70 and 5,503.00 respectively. There were 16 stocks advancing against 34 declining ones on the index.

The top gainers of the Nifty were ONGC up by 2.45%, Ranbaxy up by 1.90%, Kotak Bank up by 1.33%, BPCL up by 1.25% and HDFC Bank up by 1.18%.

Dr. Reddy down by 5.71%, Bajaj Auto down by 4.51%, Ambuja Cement down by 4.28%, ACC down by 4.17% and Hero Honda down by 2.60% were the major losers on the index.

All the Asian markets were trading in the red; Jakarta Composite declined 0.61%, KLSE Composite lost 0.43%, Straits Times dropped 1.17%, Seoul Composite plunged 0.86%, Shanghai Composite down 0.99%, Hang Seng down 1.26%and Taiwan Weighted shed 0.11%. 

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