Increased volatility, selling in Bank Nifty
diesel fell through AprilJune). Household expectations of inflation rose to double-digits and these expectations drive consumption behaviour.
RBI is unhappy at the lack of transmission of rate cuts by banks. So far, RBI has cut the repurchase rate thrice in calendar 2015, by a total of 75 basis points (0.75 per cent). An estimated 30 basis points (0.3 per cent) of those cuts have been passed on by banks which have cut respective lending rates. The central bank wants banks to cut more and hinted it might not be willing to lower rates unless banks pass on previous cuts.
RBI also says the inflation data could be skewed by baseeffects in July and August. The July and August year-onyear changes could seem low because the corresponding 2014 months had high CPI. But after September 2014, “favourable base effects” should subside, since crude oil prices fell in the second half of 2014-2015 and so did food prices. Presumably, RBI will deseasonalise all the data but how exactly it does so would influence the central bank perspective.
The Bank Nifty reacted with the usual knee jerk disappointment initially. But it seems the optimists hoping for a cut were in the minority, since the selloff was not steep and support came in, to push the index up again.
The Q1 results have been reasonable for banks, since expectations were low. Major public sector banks (PSBs) such as Bank of Baroda and Punjab National Bank have registered lower profits due to higher provisioning for their bad debts.
The government has also announced an enhanced recapitalisation package for PSBs. This may be throwing good money after bad in the absence of reforms. But the announcement has been wellreceived by the market and this could put a floor on the Bank Nifty.
The financial index could still see major volatility and more selling. But that is more due to external factors like China or the Fed than RBI policy. Bearspreads might seem tempting. For example, a long 18,500p, short 18,000p could well be worth a punt.