Over the last few weeks markets have been steadily rising despite a sharp deceleration in economic growth.
The Bank Nifty posted its biggest single-day fall in three weeks after the Reserve Bank of India (RBI) surprised the market by keeping its policy rate unchanged. The move came after the higher-than-expected retail inflation which hit a 16-month high in October due to higher food prices. What spooked markets was the sharp reduction in growth forecast to 5% by the central bank, which is the weakest in seven years.
Over the last few weeks markets have been steadily rising despite a sharp deceleration in economic growth. While the Bank Nifty fell 266.35 points or 0.83% to settle at 31,712.95 points, the Nifty Auto index slid -0.68% to end the session at 7,941.80. However, the other rate-sensitive sector — Nifty Realty —closed marginally higher, up 0.18% after heavyweights DLF and Oberoi Realty gained in the trade.
All members of Bank Nifty lost value on Thursday with stocks such as IDFC First Bank, IndusInd Bank, and Punjab National Bank declining more-than 2% in the trade. The largest state-owned lender State Bank of India declined 1.7% to end the day at `336.20.
AK Prabhakar, head of research at IDBI Capital Market Services, said “We have come to a stage where further rate cut is difficult, it is delayed but not denied. After the PMC Bank crisis, depositors have moved to stronger banks and many of them have fully transmitted previous rate cuts. However, the transmission is tepid in smaller banks so as to protect their Casa.”
Despite hefty discounts and other freebies, two-wheeler sales also witnessed a decline in November as the consumer chose to stay away from buying them in enough numbers. Two-wheeler sales for the month slipped by an over 15% year-on-year (y-o-y), the 12th consecutive month of decline.
Most auto manufacturers are producing lesser units of BS-IV models as from April 2020, only BS-VI compliant units can be sold. Analysts believe rural demand is still weak and may remain sluggish in the near term, given that prices will further rise when all BS-VI models will be launched.
Tanvee Gupta Jain, chief India economist at UBS Securities, said: “We still expect the RBI to ease policy rates further from the current levels at the February/April 2020 policy meeting as growth will likely continue to remain below potential.”
Both the Sensex and Nifty50 closed marginally lower on Thursday as stocks such as TCS, ITC, Infosys and Larsen & Toubro cushioned a further fall by gaining up to 2%. While the Sensex settled at 40,779.59 points, down 0.17%, the broader Nifty ended the day at 12,018.40, down 0.21%.
Rating agency Crisil said prolonged slowdown in the economy pulls down credit growth. Slowdown in the domestic economy, cautious lending by banks, low private consumption, and poor capital expenditure resulted in weak credit growth.
“As recovery will be very gradual and the economy is likely to remain below potential in the next few quarters, we expect policy to continue tilting towards a rate cut,” the rating agency said.