Indian equities plummet as experts continue to dissect RBI policy statement

Even as experts continue to dissect the RBI policy statement this afternoon, the benchmark indices have already slithered deeper into the red territory taking a blow of well over a percent point, brutally dragged by the rate sensitive sectors like Automobile, Banking and Real Estate. The RBI's 50 bps hike in Repo and reverse repo rates marked its ninth hike of key rates while it kept Bank rate and CRR rates unchanged. However, the RBI has unexpectedly hiked savings bank rate to 4% from 3.5%, which prompted investors to trim down their positions from banking stocks as they feared that increase in interest rates will put pressure on the net interest margins of banks. Moreover, the central bank has forecast India's economic growth to be in the range of 7.4% to 8.5% significantly lower than the forecast of 9% by PM's Economic Advisory Council, which does not seem to have gone down well with the market participants at large. Apart of the RBI's pessimistic forecasts, markets from across the globe exhibited discouraging trends as most Asian markets witnessed hefty bouts of profit booking while the European counterparts too have began the session below the neutral line thereby giving no significant upside cues to the local bourses. The wilt in international crude prices also went largely unnoticed as local investors could not spare time from unwinding their positions from the interest rate sensitive counters while they also went ahead to punish other heavyweight stocks like RIL and ONGC which shaved off around a percent point.

Meanwhile, the broader markets too were not spared either and are currently reeling under heavy selling pressure. The midcap index has slipped 0.80% while the smallcap index is trading with 0.70% losses. The market breadth on the BSE was strongly in favor of declines in the ratio of 871:1619 while 108 scrips remained unchanged. Moreover, the market volumes have already neared Rs 1 lakh crore mark, way higher, registered at this point of time in the previous session. 

The BSE Sensex got thrashed by 259.02 points or 1.36% at 18,739.00. The index touched a high and a low of 19,024.95 and 18,735.96 respectively.

The BSE Mid-cap index plunged by 0.80% and Small-cap index was down 0.70%.

There were no gainers on the BSE sectoral front, Auto down 2.51%, Bankex down 2.24%, Realty down 1.67%, Capital Goods down 1.37% and Consumer Durables down 1.12% were the major laggards in the space.

The top gainers on the Sensex were Sterlite up 1.50%, Infosys up 0.57%, BHEL up 0.41% and R Infra up 0.20%.

On the flip side JP Associates down 4.11%, M&M down 3.84%, Maruti Suzuki down 3.19%, SBI down 3% and Tata Motors down 2.81% were the major losers on the index.

Meanwhile, the Reserve Bank of India (RBI) said on Tuesday that despite some moderation in growth in the current fiscal, India may still manage to clock around 8% expansion in the gross domestic product (GDP). However, at the same time, it expects the inflation to remain high throughout the current fiscal, which can have some further downside for growth.

The central bank noted that while growth was strong in FY11 at 8.6%, signs of moderation were actually there in the second half of FY11 itself, and the slowdown in capital goods production and investment spending is clearly visible. Further downside pressure may come from high oil and other commodity prices and the impact of the anti-inflationary monetary stance. Most business confidence surveys including the one from the central bank itself too indicated some moderation in business.

Despite this, growth may still remain reasonably good at around 8% but that would require a normal monsoon and some moderation in global commodity prices.  "Based on the assumption of a normal monsoon and crude oil prices averaging $110 a barrel over 2011-12, the baseline projection of real GDP growth for 2011-12 for policy purposes is placed at around 8%. The growth is projected to be in the range of 7.4% and 8.5%," said the RBI. However, most economists probably say that actual growth might work out to be closer to the bottom of the range given by RBI if crude remains close to $110 a barrel.

On the other hand the central bank expects the inflation to continue to remain high, at least in the first half of the financial year. The central bank noted a number of upside risks for inflation First, there is a significant suppressed component of inflation as the increase in crude oil prices has not been passed on completely. Once the government hikes retail fuel rates, inflation will certainly see a jump.

Further, even if the government hikes retail prices of fuels, it would not be able to pass on all the increase in crude oil prices and therefore fuel subsidy outgo is likely to increase significantly. This can boost fiscal deficit and hence will also boost inflationary tendencies. Finally, the significant increase in the prices of several important industrial raw materials, such as minerals, fibers, especially cotton, rubber, besides coal and crude oil etc will also tend to keep core inflation high.

Therefore, the central bank expects inflation to remain above its comfort zone. It has pegged the baseline projection for WPI inflation for March 2012 at 6% with an upward bias. The RBI expects that in first half, headline inflation will remain close to where it was in March, but in second half it will start coming down on account of policy tightening and moderation in aggregate demand, and may stand at 6% by end-March 2012.

The S&P CNX Nifty got butchered by 71.60 points or 1.26% at 5,629.70.The index touched high and low of 5,710.80 and 5,621.05, respectively.

The top gainers on the Nifty were Sterlite up 1.55%, Infosys up 0.75%, BHEL up 0.50%, R Infra up 0.16% and NTPC up 0.06%.

On the other hand, JP Associates down 4.11%, M&M down 3.69%, PNB down 3.58%, Axis Bank down 3.19% and SBI down 3.13% were the major losers on the index.

On the Asian front only Shanghai Composite climbed 0.45% and Hang Seng added 0.08%.On the other hand, Jakarta Composite declined 0.98%, KLSE Composite slipped 0.18%, Straits Times sank 0.67%, Seoul Composite plummeted 1.27% and Taiwan Weighted shaved off 0.69%.

Stock markets Japan remained shut on account of Japan's annual Golden Week holiday.

The European markets have opened a negative note as the France's CAC 40 fell 0.44%, Germany's DAX down 0.50% and London's FTSE 100 eased by 0.01%.

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