Sensex Opens Lower; Automobile Stocks Drag

Fri, 21 Jun 09:30 am

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Asian share markets are lower today as Chinese and Hong Kong shares fall. The Shanghai Composite is off 0.6% while the Hang Seng is down 0.2%. The Nikkei 225 is trading down by 0.2%. The S&P 500 hit a record high on Thursday, lifted by Wall Street's expectations that the Federal Reserve will cut interest rates as soon as next month to keep the US-China trade war from stalling economic growth.

Back home, India share markets opened the day marginally lower. The BSE Sensex is trading down by 89 points while the NSE Nifty is trading down by 33 points. The BSE Mid Cap index and BSE Small Cap index opened down by 0.3% and 0.2% respectively.

Barring consumer durables, capital goods and power stocks, all sectoral indices have opened the day on a negative note with automobiles stocks and realty stocks leading the losers.

The rupee is currently trading at 69.51 against the US$.

On Thursday, the rupee on June 20 surged 24 paise to close at a one-week high of Rs 69.44 against the US currency on the back of a rally in equities and losses in the dollar after the US Federal Reserve hinted at a possible rate cut in near future.

The rupee rose to a high of 69.35 to the dollar in the day trade on the US Federal Reserve's comments that a case for a rate cut has strengthened in view of the US-China trade war and low inflation.

A spike in crude oil prices after Iran said it shot down a US drone in its coastal southern province, however, checked the rupee gains.

Brent crude futures, the global oil benchmark, rose by 2.7% to trade at US$63.47 per barrel on heightening tensions between the US and Iran.

At the interbank foreign exchange (Forex) market, the domestic currency closed up by 24 paise or 0.3% at 69.44, a level not seen since June 12.

The rupee had settled at 69.68 against the US dollar on June 19.

Meanwhile, the 10-year government bond yield fell to 6.8% on June 20, following a global trend. The yield on US Treasuries dropped below 2%, the first time since 2016 after the Fed comments.

Falling US yields make emerging markets attractive for global investors due to large rate differential.

Besides expectations of a rate cut, other factors such as a decline in crude oil prices, fears of weaker global growth, and a fall in global bond yields impacted domestic bond yields.

Bond Yields Falls Below 7%

A fall in yields would benefit the banking sector.

A reduction in the interest rate creates a conducive environment for lending. This would help to revive demand and growth in the economy.

Also, from the banks' perspective, a fall in yields would help to increase investment income on its bond portfolio. This would reflect in their quarterly earnings. This is because bond yields and bond prices move in opposite directions.

Moving on to the news from the economy. In the minutes of the June meeting released on Thursday, with inflation in India well within the monetary policy committee's (MPC) mandated target, it is crucial to give higher importance to faltering economic growth.

The MPC in June cut its key interest rate by 25 basis points, a third straight cut since the start of 2019, while also changing its stance to "accommodative," after data showed the economy growing at its slowest in more than four years.

Asia's third largest economy grew at a slower-than-expected 5.8% in the last quarter, far below the pace needed to generate jobs for the millions of young Indians entering the labour market each month.

Members broadly suggested that inflation is expected to stay within the MPC's mandated medium-term target of 4% despite the upside risks.

Concerns of an uptick in inflation from a sustained rise in food prices, uncertainties related to the monsoon and volatility in international crude oil prices remain and will be monitored, most members said.

Though the minutes suggested that the committee may be open to more rate cuts, not all may be in favour if the budget, to be presented on 5 July, is expansionary.

Annual retail inflation in May was 3.05%, up from the revised 2.99% in the previous month but stayed well below the MPC's target for a tenth consecutive month.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

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