SHOCK WAVES

Indian stock markets on Tuesday went through a trading session which can be unmemorable as Reserve Bank of India's hawkish policy statement sent shockwaves across the bourses, provoking market participants to ruthlessly square off positions from rate sensitive counters. The bears' rampage just doesn't seem like ceasing any time soon as the benchmark's southbound journey is already seven session old and if one goes by the RBI's economic forecasts, then the markets look as if they are on a never-ending declining run. The RBI's 50 bps hike in Repo and reverse repo rates marked its ninth attempt to ease the spiraling inflationary pressure on the economy. The RBI policy highlighted its worries over the current levels of inflation which it forecast will remain elevated thru the FY 2012 and pegged it at around 6% with an upward bias. The Bank rate and CRR rates were left unchanged by RBI, however it unexpectedly hiked savings bank rate to 4% from 3.5%, which prompted investors to trim down their positions from banking stocks as they feared that increase in interest rates will put pressure on the net interest margins of banks. Moreover, the central bank has forecast India's economic growth to be in the range of 7.4% to 8.5% significantly lower than the forecast of 9% by PM's Economic Advisory Council, which spooked the interests of foreign investors too. The FII's continued to plough back their funds from domestic markets on expectations that macroeconomic headwinds will eat in to their returns in the time to come and force the stock markets to underperform. Meanwhile, the decline in crude prices by around a percent point too went largely unnoticed as nothing proved decisive enough to turn the market sentiment around.
The NSE's 50-share broadly followed index Nifty, drifted way below the psychological 5,600 level and went to test the 5,550 levels and settled with a nasty laceration of well over triple digit while Bombay Stock Exchange's Sensitive Index, Sensex shaved off around a gargantuan two and a half percent points in a single session and finished above the psychological 18,500 level. The broader markets too failed miserably by the end of trade but managed to outperform benchmarks by a small margin. The midcap index plunged 1.86% while the smallcap index closed with 2.08% losses. On the sectoral front, the rate sensitive Auto index got butchered by over 3.74% points as investors chose to square off positions from auto majors like Tata Motors and Bajaj Auto as they got slaughtered by a massive 5.30% and 5.02% respectively. Another rate sensitive counter that took huge cut was the Bankex which deposed 3.11% after majors like ICICI Bank, HDFC Bank and SBI nosedived by 2.76%, 2.40% and 4.03% respectively. There remained no gainers in the BSE sectoral space while among individual gainers only BHEL managed to enlist its name in the Sensex's gainer. On the result front, majority of the stocks got punished badly irrespective of the result's merit. Stocks like Mahindra and Mahindra,  Kajaria Ceramics, Venus Remedies, Genus Power Infrastructures, Madhucon Projects, Finolex Industries, Bajaj Hindusthan's and CEAT slipped deeper into the red post result announcement while stocks like Andhra Sugars, Himalya International and  ABC Bearings bucked the trend as they got commended by the investors.

On the global front, majority of Asian markets snapped the session in the red terrain with large cuts. The South Korean benchmark remained the top laggard in the space as it plunged by over a percent point after automakers and refiners including Hyundai Motor and S-Oil tumbled. The European indices too are trading on a somber note as France's CAC slipped 0.75%, Germany's DAX shed 0.66%. On the other hand, the screen trading for US index futures too indicated that the Dow could open on a negative note on Tuesday.

Earlier on Dalal Street, the benchmark got off to a pessimistic opening as local investors remained extremely cautious ahead of RBI's annual monetary policy meet while leads from the Asian and overnight US markets too remained unsupportive. The frontline indices gyrated in an extremely narrow range for the first couple of hours however the bourses witnessed an inescapable freefall thereafter as the rate sensitive counters like banking, automobile and real estate brutally dragged the frontline indices. In a the absence of any short covering rally, the southbound journey concluded only with the close of trading session around the low point of the day after taking a nasty blow of well two and a quarter percent points. Markets plummeted on extremely large volumes of over Rs 1.72 lakh crore while the turnover for NSE F&O segment too remained on the higher side compared to Monday at over 1.55 lakh crore. Market breadth remained abysmal as there were 711 shares on the gaining side against 2102 shares on the losing side while 112 shares remained unchanged.

Finally, the BSE Sensex plummeted 463.33 points or 2.44% to settle at 18,534.69 while the S&P CNX Nifty plunged 136.05 points or 2.39% to settle at 5565.25.

The BSE Sensex touched a high and a low of 19,024.95 and 18,502.42, respectively. The BSE Mid-cap and Small-cap indices declined 1.86% and 2.08%, respectively. 

The top losers on the Sensex were JP Associates down 8.05%, Tata Motors down 5.30%, Bajaj Auto down 5.02%, M&M down 4.47% and L&T down 4.17%; while BHEL up 0.19% was the lone gainers on the index.

Meanwhile, in a move aimed at remaining ahead the curve on inflation, the Reserve Bank of India (RBI) on Tuesday hiked its key short term lending rate - repo - by 50 basis points (bps). While a 25 bps rate was already factored in by markets, the 50 bps outcome is not completely unexpected or very surprising either given the significant increase in inflation seen over last couple of months.

The central bank has also made some structural changes in how the monetary policy operates in the country. The central bank had been worried that transmission of monetary decisions was not rapid enough in the country and therefore has take some important steps in this direction. First, the weighted average overnight call money rate will be from here on the operating target of monetary policy of the RBI. What it means is that for policy formulation purposes, the RBI will look at overnight rates and try to keep them in its targeted range rather than looking at say base rate of banks or some other indicator of market rates.

More importantly, from here on, there will be only one independently varying policy rate, and that will be the repo rate. The reverse repo rate will continue to be operative, but it will be pegged at a fixed 100 bps below the repo rate. Hence, the reverse repo rate will no longer be an independent variable. At the same time, the RBI will also be instituting a new Marginal Standing Facility (MSF), according to which banks would be allowed to borrow overnight from this facility up to 1% of their respective net demand and time liabilities (NDTL). The rate of interest on amounts accessed from this facility will be pegged at a fixed 100 bps above the repo rate.

There were some other key decisions also. The RBI increased the fixed rate of interest on saving deposits by 50 bps to 4%. Deliberations are also on about deregulating this rate but for now the central bank has just increased it by 50 bps. The move is aimed at improving the transmission of monetary policy. The central bank also raised provisioning for certain categories of non-performing advances and restructured advances by 10% which would lead to some increase in provisioning by commercial banks. Overall, the policy seems pretty hawkish, but at the same time will help the central bank remain ahead the curve on inflation issue.

All the sectoral indices on the BSE were in the red. Auto down 3.74%, Bankex down 3.11%, Realty down 2.91%, Consumer Durables (CD) down 2.65% and Capital Goods (CG) down 2.51% were the major losers on the BSE sectoral space.

The Reserve Bank of India (RBI) said on Tuesday that despite some moderation in growth in the current fiscal, India may still manage to clock around 8% expansion in the gross domestic product (GDP). However, at the same time, it expects the inflation to remain high throughout the current fiscal, which can have some further downside for growth.

The central bank noted that while growth was strong in FY11 at 8.6%, signs of moderation were actually there in the second half of FY11 itself, and the slowdown in capital goods production and investment spending is clearly visible. Further downside pressure may come from high oil and other commodity prices and the impact of the anti-inflationary monetary stance. Most business confidence surveys including the one from the central bank itself too indicated some moderation in business.

Despite this, growth may still remain reasonably good at around 8% but that would require a normal monsoon and some moderation in global commodity prices.  "Based on the assumption of a normal monsoon and crude oil prices averaging $110 a barrel over 2011-12, the baseline projection of real GDP growth for 2011-12 for policy purposes is placed at around 8%. The growth is projected to be in the range of 7.4% and 8.5%," said the RBI. However, most economists probably say that actual growth might work out to be closer to the bottom of the range given by RBI if crude remains close to $110 a barrel.

On the other hand the central bank expects the inflation to continue to remain high, at least in the first half of the financial year. The central bank noted a number of upside risks for inflation First, there is a significant suppressed component of inflation as the increase in crude oil prices has not been passed on completely. Once the government hikes retail fuel rates, inflation will certainly see a jump.

Further, even if the government hikes retail prices of fuels, it would not be able to pass on all the increase in crude oil prices and therefore fuel subsidy outgo is likely to increase significantly. This can boost fiscal deficit and hence will also boost inflationary tendencies. Finally, the significant increase in the prices of several important industrial raw materials, such as minerals, fibers, especially cotton, rubber, besides coal and crude oil etc will also tend to keep core inflation high.

Therefore, the central bank expects inflation to remain above its comfort zone. It has pegged the baseline projection for WPI inflation for March 2012 at 6% with an upward bias. The RBI expects that in first half, headline inflation will remain close to where it was in March, but in second half it will start coming down on account of policy tightening and moderation in aggregate demand, and may stand at 6% by end-March 2012.

The S&P CNX Nifty touched high and low of 5710.80 and 5554.85, respectively.

The top losers on the Nifty were JP Associates down 8.65%, PNB down 4.96%, Tata Motors down 4.82%, M&M down 4.65% and Bajaj Auto down 4.62%; while BHEL up 0.09% was the only gainer on the index.

European markets were trading in the red. France's CAC 40 declined 0.86%, Germany's DAX dipped 0.91% and Britain's FTSE 100 dropped 0.11%.

All the Asian equity indices barring Shanghai Composite finished the day's trade in the negative terrain on Tuesday as raw material producers decline on the back of fall in commodities prices. Seoul shares declined more than one percent in trade after automakers and refiners including Hyundai Motor and S-Oil tumbled as investor remained caution ahead of a holiday this week. However, Chinese index rose more than half a percent, led by manufacturers due to ease in global commodities prices while the index found strong support near its crucial 2,900 level.

Stock markets in Japan remained closed today on account of annual Golden Week holiday.