A Rate Cut That Didn’t Excite Markets

  Author: Jai Prakash

Normally, when a central bank reduces interest rates, stock markets react positively, and move up. Well, the Reserve Bank of India today reduced interest rates today by 25 basis points or percentage points and the stock markets actually fell. The stock market index, BSE Sensex fell by 98.43 points to 32,476.74, while Nifty fell by 33.15 points to 10,081.50. Why did this happen?

How stock markets anticipated the rate cut The answer perhaps lies in the fact that markets were expecting a rate cut and had factored in their recent upmoves where they scaled new heights. Probably a greater rate cut would have made them respond positively.

Given the lows the retail inflation has recently reached—it was 1.54% in June—and the low growth in manufacturing and investments, the central bank thought it wise to give a booster shot to the economy. That is why it decided to reduce its repo rate—the rate at which it lends short term money to the banks—by 25 basis points. With such tell-tale economic indicators, market correctly guessed the rate cut.

What next A rate cut like this should mean lower loan rates for home loans and car loans. But that is easier said than done. In the recent past, we have seen the kind of inexplicable delay on the part of lending institutions to lower loan rates.

What is likely to come down quicker, are deposit rates. One needs to remember that to shore up their finances the banks are likely to do this. This is more so given their difficulty to ensure growth in their loans. This means additional pressure on people who rely on fixed income investments like fixed deposits (FDs) to meet regular expenses like the retired.