High liq­uid­ity & lower rate will pro­vide earn­ing sup­port to eq­uity mar­ket

The Economic Times - - Commodities Plus -

At the first mone­tary pol­icy meet for FY17, RBI cut repo rates by 25 bp. What does this mean for stock mar­kets? The repo rate cut by the RBI is as per mar­ket ex­pec­ta­tions. The tar­get to bring sys­tem­atic liq­uid­ity deficit to neu­tral level from ~1% of NDTL will in­crease money mul­ti­plier to boost credit and trade and will lower bor­row­ing cost at the con­sumer level. The In­dian econ­omy, while on strong macro fun­da­men­tals, is con­strained by high in­debt­ed­ness in cer­tain parts of In­dia Inc, es­pe­cially In­fra­struc­ture and met­als. It is con­strained by low ca­pac­ity util­i­sa­tion which re­stricts fresh in­vest­ment. Con­se­quent stress on bank­ing bal­ance sheet is not al­low­ing the econ­omy to grow at its fullest po­ten­tial. Higher liq­uid­ity and lower in­ter­est rate will pro­vide earn­ing sup­port to eq­uity mar­ket over time. Since March 16, (we have) wit­nessed dou­ble digit re­turns in the eq­uity mar­ket it is likely that mar­kets may con­sol­i­date at cur­rent lev­els be­fore mov­ing higher.

How do you ex­pect in­ter­est rate sen­si­tive sec­tors to fare post the pol­icy?

The mar­kets have de­liv­ered close to 12% re­turns in March it­self, on ex­pec­ta­tions of a rate cut by the RBI. Post this rally, we may see a cor­rec­tion and con­sol­i­da­tion, at the cur­rent lev­els be­fore the mar­kets re­sume their up­ward jour­ney. Ob­vi­ously, se­lect stocks will do bet­ter than the sec­tor (as a whole). (Con­trib­uted by Prashant Mahesh)

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