Stock markets were apparently not impressed with the modest 50-point cut in repo rate by the Reserve Bank of India's monetary policy committee (MPC) on Wednesday. The BSE Sensex gave up early gains and closed 98 points lower at 32,476 while the 50-scrip NSE Nifty also ended lower.
Top Sensex losers included Dr Reddy's Labs, Tata Motors, Sun Pharma and Kotak Mahindra Bank while stocks that bucked the trend included NTPC, Hero Motocorp and Adani Ports.
At the end of the two-day meeting, the MPC said that it has reduced the repo rate to 6 percent. The markets had factored in the 25-point cut though some analysts had pitched for a higher rate cut in view of the low retail inflation level and a sluggish industrial growth.
The apex bank retained the FY2018 growth projection (GVA) at 7.3 percent.
The RBI's MPC highlighted some of the positives in the economy such as sustained inflows into equity and debt markets — net purchases of US$ 15.2 billion in domestic debt and equity markets so far (up to July 31) — and foreign exchange reserves hit a high of $392.9 billion as of July 28.
On the flip side, the MPC said declining exports and rising imports resulted in trade deficit spiking to $40.1 billion in the June 2017 quarter on a YoY basis. "...import growth remained in double digits, primarily due to a surge in oil imports and stockpiling of gold imports ahead of the implementation of the GST. Imports of coal, electronic goods, pearls and precious stones, vegetable oils and machinery also accelerated," the MPC said in its statement.
Triggers for inflation
The bank expressed concern over upward risks to inflation, especially that emanating from farm loan waiver. "Implementation of farm loan waivers by States may result in possible fiscal slippages and undermine the quality of public spending, entailing inflationary spillovers," the statement said.
"If States choose to implement salary and allowance increases similar to the Centre in the current financial year, headline inflation could rise by an additional estimated 100 basis points above the baseline over 18-24 months," the statement added.
Low inflation levels unsustainable
The RBI did not share the widely-held view among analysts that the fall in inflation to 1.54 percent for June is sustainable. " This (June inflation) was mainly the outcome of large favourable base effects which are slated to dissipate and reverse from August. There are now visible signs, however, of the usual seasonal price spikes, even if with a delay and especially in respect of tomatoes, onions and milk," the central bank's MPC said.
Real estate dynamics
Real estate developer House of Hiranandani said the current situation makes a case for a cut in lending rates by banks to spur demand. "While the demand for real estate in India remains huge, actual consumption has remained sluggish. Given the liquidity situation prevailing in the market post demonetization, there is scope for banks to cut their lending rate further. The amalgamation of lower interest rates coupled with various progressive measures taken by the government will hopefully help buyers ahead of the festive season," Surendra Hiranandani, Chairman & MD, House of Hiranandani, said in a statement.
However, Anuj Puri, chairman of consultancy firm Anarock Property Consultants, said that factors other than interest rate would determine buying preferences for home buyers. "...it must be remembered that buyer sentiment has been impacted by a number of variables, including an overall lack of affordability in the larger cities and the slowdown in IT/ITeS-driven employment. RERA has also induced a go-slow in fresh launches, which means that there will be less fresh supply on the market. Consequently, prices are unlikely to reduce further - and more than interest rates, it is property prices which affect buying decisions," he said in a statement.