For stocks, first the jitters, then recovery

The stock markets received a central bank-related surprise for the second day in a row. Only, Friday’s was a contrast to Thursday’s. While the US Fed’s status quo move fed hopes of economic revival on Thursday and helped the Sensex soar 684 points (3.43%), the shock 25 basis points (bps) repo rate hike to 7.5% by the Reserve Bank of India on Friday made investors, who were expecting a cut instead, jittery, shaving 383 points (1.85%) off the benchmark index.

Friday’s nosedive was due to a sharp fall in the interest rate-sensitive stocks as the RBI adopted a hawkish bias to rein in the upwardly mobile inflation. The NSE’s Nifty, too, closed lower, down1.69% or 103.45 to 6012.10. The rupee fell 0.81% to close at 62.28.

The Sensex crashed 595 points intra-day before recovering later as the market digested the policy’s fine print and discerned that there were a few positives, after all.

The decision to partly reverse some of the short-term tightening measures by way of a 75 bps cut in marginal standing facility (MSF) to 9.50%, easing of the minimum daily maintenance of cash reserve ratio (CRR) to 95% from 99%, and the assurance about further normalisation of these measures in the coming months... all these calmed investors’ nerves. Even as the domestic institutional investors (DIIs) net-sold shares worth Rs 790 crore, the foreign institutional investors (FIIs) continued their buying streak pumping in another Rs 946 crore, having bought shares worth Rs 11,400 crore in the last 11 trading sessions.
The interest rate-sensitive stocks like realty, banks and capital goods were the worst hit, tanking 6.53%, 4.18% and 3.04%, respectively.

The sentiment towards interest rate movements is likely to remain subdued as the RBI has not ruled out another repo rate hike and further easing of the MSF rate.

“Overall, we consider the RBI’s monetary policy to be hawkish. We maintain our underweight stance on interest rate-sensitive sectors, primarily banking and also capital goods and real estate. We continue to stay overweight on sectors benefiting from rupee depreciation and recovery in developed economies,” said Dhananjay Sinha, head, institutional research, Emkay Global Financial Services.