A cut in the repo rate and a dovish stance by the Reserve Bank of India (RBI) on Friday failed to enthuse investors as a sharp cut in the growth outlook saw the benchmark index collapsing around 434 points with banks leading the fall.
In its fourth bi-monthly monetary policy for the year, the monetary policy committee (MPC) on Thursday reduced the policy repo rate to 5.15 per cent and said the accommodative stance will continue as long as it is necessary to revive growth. Though a rate cut was largely expected by the markets, the 80-basis point reduction in GDP forecast to 6.1 per cent for this fiscal spooked investors.
The outlook comes at a time there are apprehensions that the RBI's move to ask lenders to link certain floating rate loans to an external benchmark may hit bank margins.
The 30-share benchmark index, which opened nearly 295 points higher, gave up all the gains after the RBI announcement. It hit a day's low of 37633.36 -- a drop of 473 points -- and thereafter settled 433.56 points, or 1.14 per cent lower, at 37673.31.
Similarly, the NSE Nifty fell 139.25 points, or 1.23 per cent, to close at 11174.75.
During this week, the Sensex plummeted 1149.26 points, or 2.96 per cent, while the Nifty has declined 337.65 points, or 2.93 per cent.
The initial euphoria seen among investors following the surprise tax rate cuts has now withered away as corporate performance is expected to remain muted for the September quarter.
While the results season will kick off shortly, investors also waiting for cues from the festival season to gauge whether any pick-up in economic activity is on the cards.
Banks took a large part of the hit on Friday with top losers in the Sensex pack being Kotak Mahindra Bank, ICICI Bank and HDFC Bank, which fell up to 3.32 per cent. Other stocks such as Tata Motors, L&T, SBI, Tata Steel and Axis Bank also fell by up to 2 per cent.
However, TCS, Infosys, ONGC, Tech Mahindra, IndusInd Bank and NTPC rose up to 1.03 per cent. The overall market breadth was negative with 1,636 scrips ending with losses and 976 posting gains on the BSE. As many as 256 stocks hit their 52-week low levels, while 346 scrips hit the lower circuits.
'The issue is of transmission of the lower rates in the system. The RBI has been asking the banking system to offer loans at a level that reflects the benchmark cut, but the system is reluctant to pass on the benefits,' Motilal Oswal, managing director of Motilal Oswal Financial Services, said.
'Equity markets are cautious and watchful about the earnings season. There is a possibility that equity markets will trade cautious and range bound. In the medium to long term, I see a good investment opportunity in equities,' he said.
Gaurav Dua of Sharekhan by BNP Paribas said notwithstanding the rate cut, shares, particularly banking stocks, ended in the red as the RBI's focus on faster transmission of lower interest rates could put pressure on bank margins.
