Nasty Correction Amidst Rate Cut

Generally a rate cut by monetary authorities of India, the RBI, is seen as a sign of growth in the future and the markets show bullish trends. But this time something completely opposite happened. A simple logic can be there was a rate cut leading to reduced arbitrage for the FIIs and thus FIIs pulling out funds and thus markets fall. Although, all of that I said is true but there is a lot more to that.

RBI in its second monetary policy decided to reduce its key policy rate, the repo rate, by 25 bps to 7.25. This decision was implemented in the view of reduced inflation and weak corporate earnings numbers. It just took the amount of scope it got to cut based on inflation and Equilibrium interest rates as well.


There are various reasons to the 350 -400 points fall in the broader index, nifty, most important being the FIIs selling out. The sell off has also caused some volatility in the rupee movement making rupee weaker and less of a denomination to invest in. Although India has been a favorite avenue for investment, the fundamentals do not signal the same. Nifty tanked by around 350-400 points over the week from Tuesday post RBI action to reduce the repo rate.

Fullscreen capture 662015 124323 PM.bmp

Fullscreen capture 662015 124329 PM.bmp

Markets have been really skeptical about the controversy between the corporate earnings numbers and the GDP rate, the two being significantly negatively correlated at the moment. It is actually important to note that GDP is calculated as the cumulative value addition by about 5,00,000 companies in the new method of calculation, which constitutes both the organised and the unorganised sector. Unfortunately, the numbers of the unorganized sector, which has contributed to most part of the GDP, are not published on the MCA21 website (Ministry of Corporate affairs). This results into a negative sentiment if the country is really growing at the so-called fastest rate.

On the other hand, the MAT issues have been settled on the equity part of it but the treatment of interest and royalties from debt investments by FIIs is still an unresolved one. It has created a barrier for debt investments in the coming months.

GST, India biggest tax reform post independence, is still facing problems from the states regarding the compensation against the losses. It was proposed in the Constitutional Amendment Bill that the states will be compensated 100% of their losses for the first three years, 75% in the fourth and 50% in the fifth. States on the contrary are demanding for a 100 % loss compensation for the entire period of 5 years. Lets hope that the GST issue gets resolved soon to pump up the Indian markets soon.

Another signal that RBI gave on the 2nd of June, which led to a sell off in the markets, was the reduction in chances of further monetary easing in the near future. RBI has cautioned the markets with three important key points which it will consider before further monetary easing. Those are the effects of increasing crude oil prices, the likely El Nino effect and the upward pressure on the inflation due to the reduced forecast by IMD.

Going forward, the GOI will have to take some serious steps in the areas of PDS and be accommodative to help RBI contain its inflation target of 6% by Jan 2016. But so far the fear of crude oil prices rising seems to be subdued atleast till Dec 2015. OPEC on friday in its meet decided to keep pumping oil at least till its next meet in Dec. This is a good sign for the Indian economy since oil prices might witness some downward pressure.

Considering the given conditions, further the markets might show some mid term bullishness looking at the oil prices and US slowdown persisting. EL Nino will be a factor to look for in the coming months. Growth for the corporate sector will start picking up in the next two quarters. Banking sector remains in a shaky position amidst rising NPAs and lower profitability and especially no CRR cut is going to hurt the commercial business.

Thank you. 🙂


Published by

Akshay Baregar

A hardcore analyst who loves to read about finance, upcoming concepts, ​and their applicability. Have always wanted to become an analyst and been thinking like one from the recent past. This is my attempt to write and make the world around me aware of the financial happenings and the likely impacts/ effects on the Indian/Global Economy. My favourite topics are monetary policies, fiscal reforms, market movements, predictions, wealth management etc . Hoping for an excellent response and feedback from the readers.

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