RBI boss’ comment may have hurt the market.
By R. Chandrasekaran
CHENNAI: Indian stock markets suffered one of the worst performances in more than a year as reports of in line gross domestic product data failed to nullify the unfavorable comments aired by the Reserve Bank of India Governor D. Subbarao on inflation and current account deficit.
The Bombay Stock Exchange’s 30-share barometer dropped 455.1 points, or 2.25 percent to finish at 19,976.30 points on Friday, while the National Stock Exchange’s Nifty has lost 138.1 points, or 2.26 percent to end at 5,985.95 points. Both the Sensex and Nifty closed below the psychological level of 20,000 and 6,000 levels, respectively.
According to analysts, the primary reasons for the heavy losses are attributed to the comments made by the RBI governor, weakening of rupee against the dollar and the arrival of monsoon. The central bank chief’s comments had the potential to dash any hopes of 25 basis points reduction in interest rates that is widely expected in the June meeting.
Obviously, rate sensitive stocks and the possible impact on public sector banks of new debt norms are the worst sufferers. Private sector HDFC Bank and ICICI Bank shed 3.4 percent and 2.4 percent, respectively. The state-run State Bank of India lost 2 percent. Traders also took advantage of profit booking on the stocks that witnessed strong upside in the recent past, such as Mahindra & Mahindra, Reliance Industries, and Sun Pharma. Shares of realty major DLF, hurt by sluggish economy impacting the home sales, plummeted 5.4 percent following.
The RBI governor had cautioned on Thursday evening that retail inflation, which is still ruling high, and increased risks towards inflation will continue. He had also voiced his concern over the higher current account deficit. The central bank’s new debt recast norms also seems ill-timed as they may have more stress on the state-controlled banks’ profitability since they have more restructured portfolios compared to the private sector banks.
Subbarao’s comments have clearly more than offset the in line expectations of GDP and the narrowing of fiscal deficit to 4.89 percent for the year ended March 2013 compared to its revised estimate of 5.2 percent.
India’s GDP slowed to 4.8 percent in the fourth quarter thereby ending the year with a 5 percent growth, which the lowest in a decade. However, GDP rose modestly from 4.5 percent in the third quarter.
While the overall industry sector grew 2.1 percent in the financial year ended March 2013 versus 3.5 percent last year, the services sector advanced 7.1 percent compared to 8.2 percent during the same period. However, the financing sector such as real estate, insurance and business services growth slipped to 8.6 percent from 11.7 percent in the previous year.
Meanwhile, the Federation of Indian Chambers of Commerce and Industry (FICCI) sees more positive signals on the horizon from the GDP data. In a press statement on Friday, FICCI Secretary General A Didar Singh said a gradual turnaround and an economic growth of 6 percent to 6.5 percent is possible. The expected favorable monsoon will provide a positive atmosphere to start with.
Singh said that the data indicated a slowdown in all the three broad sub segments. While the agriculture sector rose 1.9 percent, which is slightly higher than the advance estimate of 1.8 percent, FICCI expects monsoon to help improve the numbers.
The FICCI official also said, “The RBI has already cut the repo rate by 75 bps this year and declining inflation has given some additional space to consider further cuts in the policy rates. Also, the Cabinet Committee Investments is doing a commendable job and we hope this will help bring down the ICOR from its current level of 5.”
However, the stock markets failed to see any of these and went hammer and tongs to drag down the sentiments following the concerns expressed by the RBI governor.
To contact the author, email to : rchandrasekaran@americanbazaaronline.com