RBI’s rate cut does little to cheer the markets

If earnings growth doesn’t pick up soon, the risk for markets will start looking bigger: Experts

With the easing of Consumer Price Index (CPI) inflation to 1.54 per cent in June, the market had high expectations that the Reserve Bank of India (RBI) would adequately pass on this comfort. While the Monetary Policy Committee (MPC) obliged it with a 25 basis point (bps) cut in the repo rate, the move has not pleased the Street. For one, most experts say a 25 bps cut was already priced-in as the overall fundamentals looked in favour of a low interest rate regime. Therefore, for equities, a 50 bps repo rate cut might have been more substantive to take home. Andrew Holland, CEO, Avendus Capital, says the MPC’s move hasn’t exceeded market expectations. “It is only a disappointment considering the positive macros,” he adds.

Also, with this being the third consecutive quarter of neutral stance, the RBI’s justification for not more than a 25 bps cut comes from the possible uncertainties ahead. This entails the tentative risks to banks from the implementation of farm loan waiver announced by state governments and implementation of the 7th Pay Commission. Moreover, the central bank is also anticipating inflation to rebound from the current transient low levels as the year closes.

Seen from this perspective, Swati Kulkarni, executive VP and fund manager, UTI AMC, feels that the RBI’s decision on Wednesday is justified. However, with a lot of emphasis once again made on private investments by the RBI Governor, the question is whether the rate cut is adequate to fuel the same. Clearly not, says Kulkarni. “Unless capacity utilisation reaches a respectable level of 80 – 85 per cent, the investment cycle won’t pick up. Therefore, the latest rate cut isn’t an accommodative stance by the RBI,” she says. Pramod Gubbi, head of equities, Ambit Capital, adds that considering the current scenario, unless companies are compelled to add capacities, they may refrain from capital expansion plans in the medium-term.

Many believe further rate cuts may not happen soon. Nonetheless, with lower interest rates still not being able to boost corporate earnings, experts are sounding caution. With major macroeconomic events, domestically and globally, behind the Indian equities, Holland advises investors to get their focus back on fundamentals. “Fundamentals are far from exciting and valuations are clearly not justified at these levels,” he warns. Kulkarni adds that with the drivers for revenue growth remaining elusive, the market is already pricing-in the balance sheet repair ahead of them and a possible relief from interest rate cuts going ahead.

What’s worse, as explains Gubbi, is that another round of earnings downgrade looks likely as June quarter results haven’t been up to the mark.

With the mismatch between earnings growth and stock valuations, will liquidity remain complacent to these concerns?