Sensex slides after repo rate cut by RBI

The RBI on Thursday cut the key policy repo rate by 25 basis points for the second time in a row but instead of rejoicing, the stock, bond and money markets fell sharply as a muted reaction by Governor Shaktikanta Das to a seemingly serious cash situation in banks weighed heavily on inflation and economic growth.

The BSE Sensex closed 192 points lower, 10-year government bond yields rose by 6 basis points to 7.50% and the rupee weakened 63 paise to 69.04 a dollar in the absence of a clear guideline on how the central bank was planning to handle short supply of cash in the wake of a looming fiscal slippage.

The liquidity deficit in the system is to the tune of Rs 75,000 crore. The RBI has so far conducted Rs 3 lakh crore worth of open market operations (OMOs) in 2018-19 and is in the midst of Rs 10 billion of foreign exchange swaps.

A 25 basis point repo rate cut had been priced in by the markets after the Governor met various stakeholders, including bankers and industrialists in the past many months and assured them of a policy stance that sought to give a leg-up to the slowing economic growth.

After that assurance, the market was closely watching for a straight answer on how the RBI was going to handle the liquidly crunch with banks and the increased cost of raising funds to businesses.

Though the Governor made it clear that OMOs would continue, the uncertainty around the time and quantity left the market unnerved in the wake of a large market borrowing programme announced by the government for 2019-20.

The Centre has planned to raise Rs 4.42 lakh crore through market borrowing in the first half (April-September) of 2019-20, which translates into Rs 17,000 crore per week for 26 consecutive weeks.
“We will use all tools of infusing liquidity including OMOs and currency swaps depending on the requirement and other relevant factors,” Das merely said at a post-policy press conference on repeated queries about the systemic liquidity crunch.

Money market analysts said the market got nervous as it saw a tepid response from the Governor on transmission and liquidity issues despite his acknowledging the problems of economic growth, inflation and fiscal slippage looming large in the coming months.

On the transmission of the rate cut, the Governor barely flagged the issue saying it was a concern for him.

This prompted the stakeholders to raise questions as to who would enforce transmission if not RBI.

“If the RBI cannot enforce the transmission, who can?” said Ravi Sehgal, EEPC India chairman, adding it is ironical that while the central bank appreciates the concerns on the global economic slowdown and its major impact on Indian exports, banks continue to charge prohibitive rates of interest.

When the RBI handed out a surprise rate cut in the February policy, it had raised many eyebrows because the central bank had not made any mention of fiscal stresses or slippages in the statement. It looked like a “please the market” policy.

“Early reports suggest some probability of El Niño effects in 2019. There is also the risk of an abrupt reversal in vegetable prices, especially during the summer months... The outlook for oil prices continues to be hazy, both on the upside and the downside. On the one hand, continuing OPEC production cuts will reduce supplies,” RBI said in the statement.