Sensex sees biggest fall in a month due to Inflation, drought fears

MUMBAI: The Sensex slumped to its biggest decline in a month after the Reserve Bank of India raised its inflation forecast for January 2016 and the India Meteorological Department cut its monsoon forecast even further, raising fears of a possible drought and leaving little scope for further interest rate cuts. The RBI also lowered its growth estimate for the fiscal year.

The benchmark dropped 2.37% to close at 27,188 points. The Nifty fell 2.34% to 8,236, below its 200-day moving average. The BSE midcap and smallcap indices fell more than 2% each. The market turned distinctly nervous with the NSE India VIX volatility index rising 0.54% to 16.82. RBI cut the key rate by 25 basis points.

“We were hoping for a 50 basis point interest rate cut, while the RBI monetary policy was more or less on expected lines,” said Rashesh Shah, chairman and CEO of Edelweiss Group. “RBI expects inflation to move higher and has downgraded its growth forecast – it’s not a very good sign. We expect markets to remain range bound going forward.”

Further monetary policy action depends on the monsoon and the government will have to take steps to ensure that food inflation does not increase even if rains fail, Shah said. Interest rate-sensitive stocks led the market decline on Tuesday. State Bank of India dropped 4.28% to Rs 266, Axis Bank declined 4.20% to Rs 554, while Hero Moto-Corp slipped 3.76% to Rs 2,607. SBI cut its base rate on Tuesday evening in response to RBI Governor Raghuram Rajan calling on banks to ensure the transmission of policy changes.

Without a strong revival in growth, some sectors face bleak prospects.

“Nifty has broken the 200-day moving average. We expect 8,200 to become the next support level for markets,” said Yogesh Mehta, vice-president, equities, Motilal Oswal Securities.

“Interest rate sensitive stocks, metal and mining sector will not perform over a period of time, unless we see some uptick in the economy.”

Foreign institutional investors (FIIs) sold shares worth Rs 594 crore on Tuesday. However, domestic institutional investors (DIIs) bought shares worth Rs 271 crore, according to provisional exchange data.

The rupee weakened to 63.90 per dollar from Monday’s 63.72 close. Resrve Bank of India raised its inflation forecast to 6% from 5.8% for January 2016. It lowered the economic growth projection to 7.6% from 7.8% for FY16 on account of a volatile global environment and the likely impact of a poor monsoon.

“Markets will remain range bound with little bit of downside --a 25 basis point interest rate cut was in line with expectations,” said Nilesh Shah, managing director and CEO of Kotak AMC.

“Markets will be looking to the monsoon, which is expected to be below average, and the US Federal Reserve rate-hike cycle whether it begins from June or September.”

The India Meteorological Department (IMD) cut its forecast for rain during the June-September monsoon to 88% of the long-period average from 93% previously. The lower-than-expected monsoon forecast triggered a selloff in rate sensitives such as banking, automobiles and realty stocks.